Each year, over 400,000 entrepreneurs start their own business in the United States. But, the vast majority of them have to seek funding for their business ventures in the form of loans.
The choice between lenders can be difficult, too. Should you seek a loan from a bank? Or an independent institution?
If you’re not sure where to start, we’ve got you covered.
Let’s take a look at everything you need to know about borrowing money from banks and alternative lenders.
Borrowing From Banks
Banks have long been the go-to institution for those who seek funding for their small business.
Over time, though, smaller institutions have risen to become competitors with even large banks when it comes to lending money.
There are pros and cons of using each that you’ll need to keep in mind.
Let’s start with the benefits of using a bank.
The Pros
Banks often have lower interest rates compared to alternative lenders. For those who may not be able to pay back their loans quickly, this is a significant attribute to keep in mind.
Banks also offer loans with significant term lengths (some can even have repayment terms of 7 to 10 years), which makes their low-interest rates an even more attractive option.
The Cons
Lending anybody’s money comes with a risk.
Since banks offer low-interest rates on their loans, they have to mitigate their risk in other ways.
This means that they thoroughly scrutinize their applications before lending money to prospective business owners. If your credit score and repayment history on other debt isn’t outstanding, you may find it difficult to secure one.
Additionally, you’ll likely have to offer some of your own property as collateral (house, car, etc.), which can make it difficult for individuals without valuable property to get approved.
Alternative Lenders
If you feel you’ll have trouble securing a loan from a bank, alternative lenders will likely be your solution.
Like banks, though, they have advantages and disadvantages for borrowers.
The Pros
Alternative lenders are generally more flexible compared to banks, which gives borrowers a greater chance of getting approved for a loan.
This means your credit score and past payment history are less of an issue, and you may not have to offer any of your property as collateral.
All these factors combined make quick approval for a significant amount of funding a very real possibility for most entrepreneurs.
The Cons
Higher interest rates and shorter loan terms make loans from alternative lenders a difficult option to choose for some professionals. This is especially true if the first few years of your business aren’t expected to generate a large amount of revenue.
So, if you’ll have difficulty repaying your debt in a short period of time or don’t want to deal with high-interest rates, take a moment to reconsider this loan option.
Choosing Between Banks and Alternative Lenders Can Seem Difficult
But it doesn’t have to be.
With the above information about banks and alternative lenders in mind, you’ll be well on your way to getting the most
Want to learn more about being a successful entrepreneur? Check out our article on business credit scores and how to manage them.