Alternative Lending: Small-Business Loans for Average Credit

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Shopping for small-business loans sometimes involves trade-offs.

You could shoot for an SBA-guaranteed bank loan with a lower interest rate, but you’d have to wait months for the money.

Or you could aim for a short-term loan from an alternative lender, as a nonbank online lender is called, and get funded within days. But you might be stuck with a higher interest rate and burdensome monthly — or even daily — payments.

And then there’s midprime lending, also called investment lending, which represents a middle ground. This alternative lending product is for small-business borrowers with good credit who need or want financing quickly and those with average credit who might not qualify for a traditional bank loan.

“It’s something in between,” says Sam Graziano, CEO of alternative lender Fundation.

Midprime lending at a glance

Midprime or investment lending is meant to allow you to invest in your business by easing some of the pressures of debt payment. It’s intended for small-business owners who have good credit and need fast cash, or who have average credit and can’t get a bank loan. Both should have businesses that demonstrate consistent growth.

With a midprime lender, your total borrowing cost would typically be lower than with other shorter-term financing options.

Dealstruck, Fundation and Funding Circle are some of the best-known alternative lenders offering midprime financing.

Compare small-business financing options more closely on NerdWallet’s small-business loans page.

3 things that make midprime lending different

1. Time to approval isn’t typically days or months, but weeks. With investment lending, you won’t get funded as speedily as you might with some short-term financing from alternative lenders. But you’ll still get cash quickly if approved, possibly in as little as three days, but usually within a couple of weeks.

Investment lending is best for small-business owners who might actually qualify for lower-rate, longer-term loans from a traditional bank, particularly those backed by the U.S. Small Business Administration, but don’t have the time to go through the federal agency’s rigorous application process. “It’s speed,” says Ethan Senturia, CEO of Dealstruck.

You could end up paying more in interest and fees than you would for an SBA loan, but you’ll get the funds you need for your business faster.

2. Terms are more favorable than with a short-term loan. Investment lenders offer a “bank-like product to the nonbank market,” Senturia says.

Financing terms try to allow a small business to grow without being too bogged down by debt payments. Loans are often for less than $500,000 and payable within five years. Interest rates range from the high single digits to the mid-20s.

You could certainly get a better deal with an SBA-guaranteed loan; those are usually based on the current prime rate, plus an additional markup rate — known as the spread — of 2.25% to 2.75%. At the current prime rate of 3.25%, a typical loan would charge 5.5% to 6% interest.

But investment lenders’ loan terms are definitely better than the terms on short-term options offered by many alternative lenders.

Say you’re applying for a $100,000 loan from Dealstruck. A one-year term loan with an APR of 20% would cost an additional $11,161, or 12 monthly payments of about $9,200.

If you opt for a merchant cash advance — a pricey option some small-business owners turn to for fast cash -— financing would cost about $30,000, nearly three times more expensive than Dealstruck, with an effective of APR of 96%.

Many investment lenders also offer longer loan terms with lower payments than other alternative lenders offering short-term financing.

3. Qualifying is easier than with traditional bank loans. Banks and the SBA have strict loan qualification requirements, including a personal finance statement and a statement of personal history. The agency even has a long list of business types whose owners shouldn’t bother applying.

Investment lenders ask for key pieces of information, including bank statements, a credit report and tax returns, but their requirements aren’t as extensive as the SBA’s.

Among Funding Circle clients are “borrowers the bank wouldn’t lend to,” co-founder Sam Hodges says. These include small businesses that “are very high quality but… not bankable.”

For instance, some banks won’t lend to firms with few assets, such as professional services firms or restaurants, he says.

In general, investment lending is for small businesses that have demonstrated consistent growth, Senturia of Dealstruck says.

“If you’re a startup with declining sales” you’d have a hard time getting this type of loan, he adds.

But “if you’ve been in business for more than a year and you’re profitable, those two things should make you think about working with an investment lender,” he says.

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About Fundation

Fundation combines the benefits of a bank loan with the ease and efficiency of an online lender. We offer conventional loans with competitive rates to businesses with varying credit profiles. Our technology allows us to deliver capital in as few as 3 business days through streamlining the collection and evaluation of customer information and conducting the majority of the lending process electronically. As a direct lender, we use our own capital to originate and hold the loans we make, so that we can focus on building relationships with our customers. Our dedicated customer relationship model enables us to understand each unique borrower’s business. This level of service, coupled with our best-in-class products, is why many of our customers come back to us repeatedly for more capital.

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