There was a time when the phrase “alternative lender” would have sent chills down most small businesses’ spines. In a historical sense, these lenders were the ones who would give you cash when the bank wouldn’t. In the heady, pre-crisis days, banks were happy to give money to basically anyone who walked through the door.
Now, banks have changed the lending rules. Whereas you used to need a plan, some capital, and a good head on your shoulders, now you need those things plus fifty-six years of experience, plus a relative at the bank, and they might hold your firstborn child as collateral.
In 2016, alternative lenders aren’t looking so bad. Many of these outlets provide huge sums of cash to small businesses that couldn’t get financing otherwise, and they’re not raking businesses over the coals in the process.
Today, we’ll look at a few of the more popular options out there so that you’ve got an idea of what you’re getting into when you look for your next injection of cash.
Full disclosure – these folks sent me a tiny baseball bat one time. I use it to chase wasps out of my backyard.
OnDeck lends up to $500,000, repayable in three to thirty-six months, depending on your terms. The company has now furnished over $4 billion in lending, which is about the amount a typical American spends on Starbucks in a year.
To qualify for a loan, you’ll need to have been in business for a year, have a credit score over 500 – only about 5% of the US population falls below 500 – and your company needs to have over $100,000 in revenue. For reference, banks engaged in small business lending are usually on the lookout for credit scores closer to the 800 mark.
You can apply online and have your response almost immediately, with the cash hitting your account within 24 hours. You’ll start paying that loan back just as quickly, with OnDeck pulling from your business account on a daily or weekly basis, depending on the loan you choose.
Kabbage focuses on smaller businesses, or at least on businesses with smaller borrowing needs. The company offers loans from $2,000 to $100,000, paid off in either six or twelve months.
The bar to qualification is a little lower than it is with OnDeck, as businesses need a year of operation with just $50,000 in annual revenue. One of Kabbage’s interesting points is its ability to connect to your accounting software to determine your financial stability.
Kabbage uses a fee-based system, eschewing the familiar territory of “interest rates” – more on this later. For Kabbage borrowers, you’ll pay back a sixth or twelfth of your loan each month, with a fee of between 1.5% and 12% of your total loan tacked on to the base payment.
LendingTree connects small businesses with lenders. Because the site connects you to a ton of different lenders, terms can vary widely. In fact, using LendingTree, you could be connected with OnDeck or Kabbage.
The thing I like best about LendingTree is that it’s a company that’s incentivized to give you the best lending experience possible. Your word of mouth advertising is going to be worth more than the fee Lender X gives it for finding you. As such, LendingTree is much closer to being an advocate than a lender.
On the downside, it does mean a lot of variance in the kinds of loans you’re going be offered. There’s also more downtime and waiting, as a lot of different lenders process your info in different ways. If your business needs cash right now, you might have some frustrations with LendingTree.
Interest rates – or lack thereof
One of the things I like most about LendingTree is that it gives you information – like review, loan calculators, and advice articles. One of my major frustrations with companies like OnDeck and Kabbage is the general reluctance to put anything in common terms.
Kabbage, for instance, doesn’t give you an annual rate breakdown in its sample loan calculation. OnDeck uses the term “total interest percentage” (TIP), which is more common in the mortgage field than in business lending. TIP is especially frustrating because it obscures any apples-to-apples comparison with other borrowing options. It also looks much better than an APR for loans repaid under a year.
Kabbage’s use of fees does the same obfuscation – that’s a third grade word joke, right there – and its shifting fee structure has no benefit for the borrower, as far as I can tell. It’s just a way to frontload risk management, by making you pay more in the first few months in case you default later on.
If you’ve got good credit, you can go to your big bank. If you’ve got decent credit, you can make friends with your community banker – think Regional Bank 1 or Pig Callers Credit Union. If you get desperate, you can put it all on a credit card, a la Capterra’s founder, who took on about $200,000 in credit card debt to get off the ground.
Of all the things you’ll buy as a small business owner, money is one of the most expensive. Repayments will change the way you make other business investments, so you have to be careful about the amount you’re committing to repaying each month.
OnDeck, Kabbage, and LendingTree are all fine places to borrow money. I don’t want to disparage them, but you’ve got to be smart about it. Your credit history and your company’s sales can help you get a better rate, but you’ve got to go out and find it.
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