When it comes to financing your business, choosing the right source of funding is as crucial as making strategic business decisions. The landscape of business loans has diversified significantly, offering entrepreneurs options ranging from traditional banks to innovative alternative lenders.
This article explores the differences between these two sources of business financing, helping you decide which might be the best fit for your business needs.
Interest Rates and Terms Comparison
Traditional Banks: Generally, banks offer lower interest rates compared to alternative lenders, especially for their existing customers who the bank knows well. The banks can offer good terms to their existing customers because banks can access funds at lower costs and often only engage with less risky ventures. However, the more favorable rates come with stringent eligibility criteria and loan terms, which might not be ideal for every business or borrower need.
Alternative Lenders: While often featuring higher interest rates, alternative lenders offer loans when a bank has to say No. The alternative lenders can say Yes, and cater to niches that banks often overlook such as small businesses in need of quick cash or those with less-than-perfect credit histories.
Also, alternative lenders that do not take deposits or provide banking services such as checking accounts or treasury management are not regulated like banks. They can take-on more risk and provide financing that banks cannot. Most alternative lenders work nationwide, providing loan products that can serve financing needs that many banks do not service.
When a borrower finds him or herself outside the “credit box” of their commercial bank, an alternative financing provider is often the right choice to provide the needed financing.
Application Process and Speed of Funding
Traditional Banks: The application process with banks is often lengthy and complex, involving detailed scrutiny of your business plan and financials. This thorough evaluation can extend the funding timeline, sometimes taking weeks or even months.
Alternative Lenders: Alternative lenders, on the other hand, pride themselves on their quick processing times, often using online platforms that allow for faster data verification and application processing. This can mean getting your funds in as little as a few days, a critical advantage when immediate opportunities or needs arise.
Required Documentation
Traditional Banks: Expect to provide extensive documentation when applying for a bank loan. This includes business financial statements, tax returns, business plans, and more, which helps banks assess your ability to repay the loan. Banks are heavily regulated and risk adverse, meaning they cannot offer financing in many circumstances.
Alternative Lenders: They typically require less documentation than banks, focusing more on recent business performance rather than historical financials. Alternative lenders are not regulated as are banks, and can take on more risks in financing than banks. This can be particularly beneficial for newer businesses that have not yet established a long financial history.
Flexibility and Customer Service
Traditional Banks: Banks tend to be less flexible regarding loan terms and negotiations. Their customer service might also be more formalized and less personalized, due to the larger scale of their operations.
Alternative Lenders: They often offer more flexible terms and are willing to customize loan products to suit specific business needs. Additionally, alternative lenders usually provide more personalized customer service to guide borrowers through the loan process.
Case Studies of Successful Financing
To illustrate these points, consider the case of a small tech startup that required a rapid cash injection to capitalize on a market opportunity. An alternative lender was able to provide an unsecured loan within a week, allowing the start-up to move swiftly. In contrast, a well-established restaurant chain seeking to expand into new regions found it advantageous to pursue a traditional bank loan, attracted by the lower interest rates and the ability to negotiate a larger sum based on their strong financial history.
Trust Financing Solutions can often provide financing to businesses and Commercial RE buyers when a bank must say No. Contact us and let’s get your funding in place. We can help you buy a business, buy commercial real estate or fund your business needs.
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This article provides a comparative overview of traditional bank loans versus alternative lender offers, helping you to understand their pros and cons. Whether you opt for the traditional route or a modern alternative financing, understanding these differences is key to making an informed and beneficial financing decision.
NOTE: What is a banks “Credit Box”?
A bank’s credit box is the range of credit risk that the bank is comfortable taking on. It also refers to the availability of loans.
How does a bank’s credit box work?
- Lenders use their credit box to determine the types of loans they offer
- The credit box can expand or contract based on the lender’s risk tolerance and the economic environment
- Lenders can expand their credit box by changing their policies, client base, and origination policies
Examples of credit box changes
- Before the financial crisis, lenders expanded their credit box by lending to borrowers with lower credit scores
- After the 2007–09 Great Recession, lenders became more cautious and contracted the credit box
- During the COVID-19 pandemic, the credit box contracted again