In the aftermath of the 2007–2008 financial collapse, banks became wary of financing businesses—and small businesses in particular.
As it turned out, small businesses felt the brunt of the pain. In 2009, banks originated 58% of all small business loans up to $1 million. By 2015, that number dropped to 43%.
Sensing a need in the market, a number of alternative non-bank lenders emerged. These lenders have proved much more willing to finance small businesses—even those that didn’t have great credit scores.
While non-bank lenders have been of great service to countless small businesses over the last several years, they are not without their downsides. In order to determine whether it makes sense for your company to seek out a loan from one of these alternative lenders, you need to weigh the advantages and disadvantages of this kind of small business financing.
5 Advantages of working with a non-bank lender
1. Quick and easy application process
Most non-bank lenders have streamlined the loan application process. Generally speaking, you’ll just need to submit basic business information and some financial data. Borrowers can expect to complete the application process in as fast as 15 minutes with certain tech-savvy lenders.
2. Funds can be in your account within one business day
Assuming your application is approved, money can appear in your business’ bank account within 24 hours in best case scenarios. With cash in hand, you can start growing your business right away.
3. You can secure financing even if you have no credit or subpar credit
Non-bank lenders often have more flexible borrower requirements. If your business hasn’t had luck securing financing from traditional financial institutions, you’re likely to have better luck with an alternative lender.
4. You can use the funds however you see fit
Some small business loans are expected to be used in very specific ways. For example, if you own a construction company and apply for a loan with the intention that you’ll use the money to buy a new bulldozer, that’s exactly how the lender requires you to spend it. For the most part, non-bank lenders require no such stipulations on their loans. You can use the money to grow your business as you see fit.
5. You can develop a relationship with a lender and get lower rates over time
Partner with the right lender and repay your debt on time and you should be able to continue the relationship for the foreseeable future. Over time, you may be able to get lower interest rates on the loans you take out.
5 Things to consider before working with a non-bank lender
1. Non-bank lenders sometimes charge higher interest rates
If you work with a non-bank lender, you might get hit with higher interest rates than you would if you worked with a bank. As with any loan, if you get a loan from a non-bank lender and encounter unforeseen obstacles that slow your business down, it may become difficult to pay monthly installment payments on time.
2. You may only be able to get a large loan
Some non-bank lenders may be unwilling to sign off on smaller loans, just like traditional banks. For example, the lender may require that loans are at least $50,000, or even more. While a loan of that size can certainly help some businesses grow, not every small company needs or wants to take on that much debt. For example, you may only need a few thousand dollars to help cover operating expenses while you’re waiting on customers to settle their accounts.
For most small business owners, it doesn’t make sense to take out an enormous loan unless it’s absolutely necessary. That’s why it’s important to find out the minimum amounts that you could potentially borrow when you’re evaluating a non-bank lender. For example, Fundbox offers approved customers the ability to draw in amounts as small as $100 up to their credit limit (max $100,000), in order to better fit the specific needs of small and growing businesses.
3. Non-bank lenders may go out of business
Since non-bank lenders are relatively new, there’s a chance the one you partner with could go out of business. Imagine your non-bank lender suddenly closes its doors. How would that affect your business operations? When deciding whether to work with a non-bank lender, it’s a good idea to look at them the way you might evaluate any other business before you decide to trust them and transact with them.
Some things to investigate include: Have they been in business for at least a few years? Are they well-funded? Are they backed by a legitimate bank or source of funds? Are there reliable support staff for you to talk to if you have questions? Do they have lots of positive customer reviews?
4. You may not get any discount if you repay your loan early
Let’s say business has been significantly more robust than you projected. You took an 18-month loan out 10 months ago, but you’re ready to it back in full. Despite your early repayment, your lender may not give you any prepayment discounts. (Fundbox is different in this regard, since the fees are all flat and usage-based: If you draw funds using Fundbox, you always have the option to repay early, saving a ton of money on fees.)
Whichever lender you decide to work with, you’ll want to make sure you ask about any repayment penalties or extra fees. And about those fees…
5. Some non-bank lenders may charge hidden fees
Before you sign any contract, read the fine print and ask questions. Some lenders may tack on disbursement fees, origination fees, repayment fees and more. Do your due diligence to make sure you’re not surprised when your first installment invoice arrives. We recommend asking about any and all fees that the lender might charge before you sign any agreements.
Depending on your needs, it may very well make sense to partner with a non-bank lender to get funding for your business.
If you’re considering alternatives to traditional bank financing for your business, there are many small-business-friendly solutions to choose from. To learn about them in detail, check out our in-depth guide to Small Business Funding, here.