American Dream

Alternative Lending: Considerations for Aspiring Entrepreneurs

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New businesses need a healthy influx of cash, and help is available in the form of alternative lending options. Traditionally, anyone looking to fund a new business or put more money into their existing business would go to the bank and see what they could get. But in the Internet age, there are options available beyond big banks.

There are a number of reasons to consider using an alternative lender. If you’re a business owner with a low credit score, a fledgling company, or insufficient collateral, a traditional bank might reject you for a loan. Sometimes, a business owner has to pounce on an idea and can’t wait to fulfill all the conditions needed to secure a traditional business loan. Any of these situations might lead you to try out alternative lenders.

Regardless of the reason, you must do your due diligence. There are many reputable companies out there, but there are also some sharks swimming in the normally calm waters of alternative lending. While many business owners want their money quickly, you have to do some research to avoid doing business with an unscrupulous company.

Take these tips to heart:

  • Know the terms. Interest rates from alternative lenders are usually higher than those from traditional lenders. However, many alternative lenders provide competitive rates. Just remember: If a rate sounds too good to be true, it most likely is. Always ask the lender for the full amortization schedule before signing off on your loan. This way, you’ll know whether the interest rate you’re quoted will stay in effect throughout the life of the loan. Because many interest rates rise over time, this is the best way to be prepared.
  • Take just what you need. Make it a habit to not borrow more money than you need. This will minimize the chance of your business falling into debt. If your lender pushes you to take out a loan for a larger amount than you requested, look for another lender. This could be a sign that they are just trying to increase their commissions.
  • Deal with a reputable company. There are many honest and well-known alternative lenders. Companies such as LendingTree, Prosper, Lending Club, and PayPal are just some of the established choices out there, and they offer transparency as well as overall good practices. If a company has a shoddy website or if it’s difficult to find the fine print or disclosures, then you should look elsewhere.
  • Shop around. As stated previously, alternative lenders usually offer high interest rates—but they shouldn’t be too much higher than those from traditional lenders. Some companies quote rates around 30–40 percent. This is much too high, and these rates should not be considered. Rates around 8–10 percent are much more reasonable. No matter how quickly a company can get you the money, a too-high rate isn’t worth it.

Alternative lenders allow borrowers to receive funds quicker and with fewer hoops to jump through than traditional bank loans require. Though alternative lenders’ rates are usually higher, reputable companies are able to provide competitive rates with minimal risk. It’s up to you to do right by your business by selecting a company with a strong track record of reliability and customer service.

Syed Hussain is a blogger and freelancer specializing in personal finance, millennial issues and healthcare.  He especially makes personal finance simple and easy to understand for college students and young professionals.