If you’re the credit manager, accountant or worse, the CFO of a small business, you’re constantly worrying about two things: your blood pressure and cash flow. Unfortunately, when one is high, the other one is likely running low.
There are plenty of horror stories of small business owners and their financial managers maxing out all their personal credit cards and eating cardboard for a week just to meet payroll obligations.
And if the big banks had rolled out the red carpet to your small business like they do to Big Business, maybe today you would have few alternatives. Luckily for you, that thing called the internet is literally breaking the banks.
One look at the cost per click of Google’s keywords tells you all you need to know: there is a lot of competition and big money in finance. “Loans” is the second most expensive keyword you can buy, after “Insurance”. The suggested bid for the keywords “Small Business Loans” is $38.50 per click but very high competition and volume means it could frequently cost $77.00 or more.
If this is how much lenders are willing to pay – per click – you can be sure that there are plenty of lenders out there vying for your small business. In fact, a whole new breed of marketplace platforms and online lenders broke into the scene almost ten years ago, promising to disrupt the banking world. While the revolution has been slow, the banks, community banks, credit unions and building societies are definitely feeling the sting in 2016 as a wave of new, tech-savvy, mobile-driven platform business makes the loan application and approval process faster than ever before.
But before jumping right in, or feeling a little overwhelmed by the increasing choices, below are some questions you may wish to ask yourself when considering an alternative lender.
Questions to ask yourself
How much do I need?
Some alternative lenders offer unsecured lines of credit for as much as $250,000. If you need more than this amount, an alternative lender may not be right for you.
What do I need the money for?
Certain alternative lenders specialise in niche lending such as equipment, finance, working capital, merchant cash advance, equipment leasing, and commercial mortgages, to name a few different types. It can sometimes be worth finding out if there is a specialty type of finance that matches your intended use of the funds.
What type of loan and loans terms are right for me?
You may wish to choose a fully drawn advance, overdraft, or line of credit loan, and the terms may be fixed or variable with a lengthy or short repayment period. This all depends on your individual circumstances.
What type of security, if any, can I put up?
Unsecured don’t require any collateral, and alternative lenders are far more likely to offer these types of loans. If you do have commercial, residential, or personal security, you may also consider putting this up but it’s not always necessary with alternative lenders.
Do I have enough of a financial history for the lender to make a decision?
Alternative lenders require far less documentation in order to make a loan decision, as they assess a number of online touch points and can attach straight to your accounting software to make their assessment. If you don’t have years of paperwork and evidence of cash flow, an alternative lender may be your best bet.
How quickly do I need the funds?
Traditional lenders often take several weeks and sometimes months to provide the funds (if they approve you at all). However, many alternative lenders can provide as quickly as within 24 hours, after giving a loan decision in minutes. This is another key difference between alternative and traditional lenders.
Have I done my homework?
You don’t want to waste your valuable time with tyre kickers. You want to know very quickly if you’re eligible or not. Read user reviews online and check with the Australian Competition and Consumer Commission, Choice or online comparison sites like Canstar to ensure your lender is the real deal.
Will I receive any nasty surprises?
If the lender wants to check your personal credit score as a pre-requisite to the loan, consider this: The more dings you get on your file, the worse your credit score becomes, and the less likely other lenders will provide you with credit. Proceed with caution where this is the case.
The verdict on alternative lenders?
As mentioned, they are fast and convenient: Funding can occur in as little as 24 hours. And they probably won’t care about your business plan or years of cash flow history, just your ability to repay the loan. Some also have tailored rates that reflect your credit risk, rather than applying standard rates to everyone, which equates to a fairer pricing system for everyone.
Alternative lenders can sometimes charge a higher interest rate than the banks, as a result of lending more often to more businesses. They are usually shorter term also, which may not work for everyone.
They cherry-pick the best customers, so you may need to be running a solid business to qualify.
*David Jackson is the founder and CEO of FundX (www.fundx.com.au), a marketplace, balance sheet lender that uses money from high net-worth, sophisticated and institutional investors to solve short-term cash flow gaps for Australian SMEs via a sophisticated single invoice discounting platform. David is a serial entrepreneur with over 20 years’ experience as an angel investor, founder,and mentor to early stage businesses in Australia, Asia and the US. He is also an active member of Stone & Chalk and BlueChilli, sits on the board of Sydney Angels Inc., mentors a tincubate.org.au, and is a regular contributor to the Australian Financial Review.