We’ve entered a new age when it comes to startup financing. No longer must startups and small businesses go to a traditional bank, hat in hand, and plead for a commercial loan, not when there’s a huge pool of alternative lenders to choose from.
These newer lenders offer financing to new business based on different criteria than banks look at, making debt financing an option for more businesses than ever before.
Let’s take a look at some of the big ways alternative lenders have changed the game.
1. The Loans Are Lightning Fast
Traditionally, a bank loan can take up to three months to process. That translates to approximately 90 days of hand wringing and shifting available finances to make do in the interim. With alternative lenders, you could receive funds via a wire transfer in less than 24 hours. This also includes the application process. Many alternative lenders offer a mind-blowing 10-minute application and approval process. How do these companies turnaround loans so fast? They look directly at your business’s income and financial information.
With that data, they get a clear picture of whether or not they can expect a business to pay its debts, and can swiftly follow up with a loan quote and then financing. Fast business loans aren’t limited to alternative lenders. SBA loans are some of the best loans a small business can get, but typically take weeks to process. However, companies such as SmartBiz work to streamline this process, and can deliver SBA funding within a week of application. That’s slower than lightning, but still remarkably fast for an SBA loan.
2. The Loans Are Accessible for All
A sub-600 personal credit rating would have torpedoed someone’s odds for a startup loan 10 years ago, and a sub-700 score wouldn’t have done them much better. But not anymore. Traditional banks are likely to reject you based on credit score alone, but many newer lenders have been downplaying the importance of your credit score in favor of other factors. Accion, for instance, is one microlender that offers loans to startup business owners with credit scores as low as 525.
Loan sizes range from $500 to $50K, and the amount you can be approved for depends on how long you’ve been in business. For example, you must have been in business for at least six months to qualify for $5,000 and up. As mentioned, other lenders sidestep personal credit to look directly at a company’s financials. PayPal Working Capital is another example. Though they’re limited to PayPal users, this allows them to get an instant picture of a company’s PayPal sales and offer them a surprisingly inexpensive loan.
3. Social Media Informs Lending Decisions
Did you know that your social media presence can actually help you secure a small business loan? While your social media page will not cancel a poor credit score or cash flow, it can positively influence lenders to finance your business. Some alternative lenders, such as OnDeck and Opportunity Fund, use social media data to assess the viability of an applicant. This data is especially valuable for the so-called “credit invisibles” who don’t have a credit score yet.
Approximately 10 percent of Americans (45 million people) are without a credit score. Lenders use social media profiles to verify that a business is what it appears to be. They may take into account the number of reviews, the content of the reviews, and to simply verify basic information. And given that the head of FICO has talked about new factors in determining credit scores, it’s possible social media will become an ever greater factor in loan eligibility in the future.
Related Article: Bank Loan Request, Denied: Who Will Help Fund Your Business Now?
4. Invoice Factoring Is Modernized
Invoice factoring is a form of business financing that has been around for a long time. Traditionally, a factoring company would simply buy a business’s invoice. So if you had an outstanding invoice of $800, a factor might buy it for $720, and then it would be on them to collect the invoice. The biggest downside here is obvious: it places an outside company in between you and your client. Newer factoring companies, such as Bluevine and Fundbox, have made some significant changes to the old model.
These companies pay for the invoice, but they don’t intervene in business-client relationships. Collecting funds is still on the business. They’re also significantly cheaper than traditional factors, with APRs around 40 to 50 percent instead of 80 percent. With that in mind, invoice factoring has become a much more appealing option to small businesses that might not have considered using it before.
5. Investment Banks Provide Small Business Loans
When you look closely at newer lenders, you’re likely to find their capital comes from a mix of VC funds and traditional investment banks. OnDeck, for instance, has raised hundreds of millions from sources such as Goldman Sachs and Deutsche Bank, and other companies such as Bond Street and Dealstruck have also turned to investment banks for hundreds of millions in funding.
Traditionally, investment banks and commercial banks service two separate client bases. By financing companies focused on financing small business, they’re indirectly financing small businesses and competing with commercial banks.
This is great news for startups. Commercial lending has long been essentially off-limits for startups banks want to see not only impeccable credit and detailed financial data but two or more years in business, which means an automatic "no" for new businesses. The rise of new kinds of lenders gives startup businesses options they’ve never had before and promises a new era in startup financing.