Finance August 7, 2014 Last updated September 18th, 2018 1,190 Reads share

The Danger Of Being Sold On Alternative Lending

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Alternative lending has been going through a Renaissance over the past few years. Even as the U.S. economy continues to get closer to a real recovery, access to traditional business financing for the nation’s smallest businesses (those with 20 or fewer employees) has hardly budged. Numerous alternative lenders have been

How the Alternative Lending Industry Really Works

An increasing number of small business owners are getting comfortable with alternative lending, and this has not gone unnoticed- especially among investors hungry for high returns. Over the past couple of years, major online lending platforms, such as OnDeck, Kabbage, and the peer-to-peer lending site Lending Club have all received massive influxes of cash by third party investors.

Business is not only booming; it’s in vogue. Even big, online brands, such as Paypal and Amazon have jumped into the fray with their own short-term business financing products. While this infusion of capital helps these alternative lenders finance more businesses, it also means that they have more pressure to focus on short-term profits.

On occasion, I see complaints online from business owners who tried to apply for funding with one of the major online lenders and either got rejected or were offered a very unattractive package. What these business owners may not realize is that in order for online lenders to make enough profit, they rely on big data and proprietary algorithms to decide who is fundable and who isn’t. It’s an automated process that the biggest, most successful online lenders have perfected to limit their risk, maximize their profits, and ultimately satisfy their investors. So it doesn’t matter if you are doing a certain amount of sales, or you’ve been in business for 10 years, if you don’t fit their narrow definition of fundable, then you won’t be approved. Period.

And, even if you are approved, many of these lenders are very concerned about getting their money back as quickly as they can for as much as they can. This often leads to a very high cost of financing (real annual lending rates can range from 20 to 200 percent with a typical amortization of 6 to 12 months), and if you should fall behind on your payments, you can often expect aggressive collection tactics, such as forced sweeps on your business accounts.

Bottom line: be careful with alternative lenders that put short-term profits above long-term relationships.

The Rise of Alternative Lending Advisors

As the alternative lending industry continues to expand and even traditional investment institutions try to get their piece of the pie, it has created a new void in small business financing. Small business owners overwhelmed by the options and unwilling to pay the sky high cost of alternative finance, have increasingly been turning to a small group of alternative lending advisors.

Alternative lending advisors work differently. They are more focused on the long-term relationship with a business, rather than short-term gain. For this reason they make an effort to give business owners the best financial solutions to fit their specific situation and to help them achieve both their short-term and long-term financial goals. Often these solutions are much cheaper , or they are used as a stepping stone to cheaper financing in the future, and they come from the advisor’s screened, handpicked pool of creditors.

In short, there are plenty of alternative lenders out there that put a tremendous amount of effort into selling their pricey products to you. The more businesses that fit their criteria and apply for funding, the better, and sometimes this setup works for the business, as well. Then there are those companies that are not just promoting financing, but also their personal expertise in putting together the best financing package for your company. It’s a classic win-win. You get the best, often cheapest financing possible, while they get a long-term customer.

Images: ”Approved small business loan application and dollar billsShutterstock.com

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Terry Robinson

Terry Robinson

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