Finding the right alternative lender can make a huge difference for small business.
A good alternative lender is one who is cognizant of their role within the small business industry–a means to an end. Alternative lenders should act as a bridge for small businesses to get them out of a financial hole and back into a positive cash flow. A good alternative lender lends the borrower just what they need to achieve this goal, not the max amount that the borrower qualifies for in order to increase payments and interest.
Because we don’t know a lot about alternative lending industry activities–how much they lend each quarter, the terms of all loans, or even who all of the lenders are–what distinguishes a “good” alternative lender from a “bad” alternative lender is a bit of a gray line.
However, there are some definitive things to think about when seeking capital from an alternative lender to decide if they have you and your businesses best interest in mind, or if they are solely focused on collecting payments. Here are some questions to ask when pursuing an alternative lender for financing:
1. What percentage of the time do the borrowers need to come back to the lender for more money? Knowing the renewal rate of the lender will help you determine if it’s likely your business will get trapped in a debt cycle.
2. What are the prepayment penalties? Can a customer get out of the loan at anytime with little to no prepayment penalty? Or are they locked in to paying the balance of the loan for the length of the loan?
3. What percentage of clients graduate to bank financing? If this stat is relatively high, it’s a good indicator that the alternative lender is interested in helping business move into loan products that are more affordable with longer amortization periods.
4. What is the lien structure for the alternative lender? Do they take blanket liens on all assets of the company, which can make it difficult to borrow money in the future from other lenders? Or do they take liens on specific assets that they are borrowing against?
5. Does the lender offer counseling or advice? Lenders that loan money without any counseling generally don’t have the borrower’s best interest in mind. A good lender will offer the borrower counseling regarding cash flow impact and making sure that there is a clear plan for the borrower to be able to afford the loan and make the business better with the loan.