4 Questions to Ask Before Using Alternative Lenders

Guest Post :: Have you tried to secure a loan and been rejected? Chances are someone reading this can answer “yes” to that question. That’s why we often suggest the use of alternative lenders.

While it’s often difficult for small businesses to get loans generally, it’s been more of a struggle for women. This is upsetting on a couple of different levels: 1) Obviously, we want loans to be granted fairly across gender lines; and 2) women-owned businesses are growing 

faster than the average, which means they’re employing people, who are funneling more money into the economy.

And now we’re learning that the biggest banks have decreased their lending to small businesses by almost 40% and nearly $30 billion since 2006. Yes, big bank lending has ticked up since the depths of the recession, but not nearly to pre-recession levels.

Given the low-interest rate environment, this could mean missed opportunities for many businesses.

The difficulty may have also scared away many entrepreneurs from even seeking a loan.

In a 2014 SurePayroll survey, just 17% said they were looking to seek lending. For the small business with only a few employees, often they don’t have enough cash on hand to get more capital – and they turn to credit cards, friends and family, or retirement savings for smaller amounts.

Turning to Alternative Lenders

Those that did seek capital were looking significantly more to secondary sources.

There’s been a fairly drastic shift in borrowing behavior. The majority of small business owners no longer turn to banks for loans, and the number of people willing to use a non-bank alternative has tripled.

Sites like Kabbage.com and OnDeck.com allow small business owners to find out if they qualify for a loan almost instantly, and then have funds within days. Other sites like Lending Club and Funding Circle create an exchange for investors seeking higher yields on their money and small business owners in need of capital.

The Founding Moms’ Jill Salzman used a person-to-person lending service called Kiva Zip that offers zero interest loans to entrepreneurs.

“We were able to launch an entirely new opportunity for our business, The Founding Moms Community, thanks to a Kiva Zip raise,” said Salzman. “It goes against the grain of the traditional fundraising efforts businesses normally go through: There’s no interest, it’s a loan, and your contributors are folks who believe in your biz. Couldn’t be a better way to get funded than that!”

Of course, with other services there is a risk that with fast access to cash comes higher rates on the loans. In some cases, non-bank alternative lenders charge as much as 30%, so you’ll want to do your homework on the terms of any loan.

According to SurePayroll’s data, though, those who have used alternative lenders had a good experience.

Is an Alternative Loan Right for You?

Assuming you’ve had trouble securing a loan from a traditional outlet, or suspect you might, you should still do your homework on whether or not an alternative lender is right for you.

Consider these 4 questions:

1. Why do you need a business loan?

You don’t want to take out a loan unless you know exactly what it will be used for. What are you going to do with the money and what do you expect in return?

If you take a loan of $50,000 at 10%, are you going to get a 20% return on that money once it’s invested in your business? The numbers have to make sense.

2. Which lender is best?

There are a variety of companies moving into the alternative lending space, many of which may be willing to provide you with a business loan, but interest rates on the loan can vary greatly by provider.

Your job is to compare a variety of lenders, local and national, to find that one that offers the loan with the best terms and conditions.

Like any growing industry, companies pop up that may not have your best interests in mind, and you need to exercise caution in which one you choose.

3. What is your appetite for risk?

Many entrepreneurs have more risk tolerance than the average person. They understand sometimes you need to spend money to make money, and they’re optimistic enough about the future to take on some debt.

That doesn’t mean you’re wired that way. If that $50,000 loan with a 10% interest rate might give you a chance to grow, but at the same time it’s going to keep you up at night and cause a great deal of stress, maybe it’s time to think twice.

There’s no rule that says your business has to grow at some rapid rate. It just has to support the lifestyle you want to lead.

4. Is your company in good position to take a loan?

The trouble a lot of small companies run into is they simply don’t have enough money to secure a loan. It may seem unfair, because if you had the money you might not be asking for the loan.

At the same time, you don’t want to put yourself in the perilous position of not being sure you can pay it back. And with alternative lenders, you may have a relatively short amount of time to repay the loan.

This means something different to every company. Do you have the credit score necessary to obtain a loan? Is your company in position to make monthly payments until the balance is paid off? This isn’t a decision you should rush. Don’t apply for a loan unless you feel comfortable with how it will change your company.

Andy Roe is the General Manager of SurePayroll, Inc., a Paychex Company. SurePayroll is the trusted provider of easy online payroll services to small businesses nationwide. SurePayroll compiles data from small businesses nationwide through its Small Business Scorecard optimism survey, and exclusively reflects the trends affecting the nation’s “micro businesses” — those with1-10 employees. You can follow Andy on Twitter @AndrewSRoe.