Alternative lenders. “Small businesses should be aware there are multiple channels available for borrowing needed funds,” says S. Michael Sury, lecturer of finance at the University of Texas at Austin. “There is a cottage industry full of private investors, hedge funds and private equity firms that have entered the direct lending business.”
Alternative lenders can be more flexible than commercial banks, as they have less regulation on the types of loans they can make.
There are two categories of alternative lenders:
Direct lenders. Direct lenders are finance companies that fund your loan with capital other than a bank and without a middleman such as a broker, investment bank or private equity firm. Some direct lenders offer SBA loans. Typically, small to midsize businesses borrow from direct lenders.
Peer-to-peer lenders. Online peer-to-peer lending directly connects you with investors who usually have a diversified loan portfolio made up of small portions of loans. A loan is often divided among several investors.
Borrowing criteria is usually less stringent than at traditional brick-and-mortar banks. Alternative lenders provide loans to borrowers who otherwise may not have access to financing, such as startups or businesses with a shaky financial history.
Because financing through a P2P marketplace poses a larger risk to lenders, the interest rates are often higher. Interest rates vary, but alternative loan products can have annual rates from 15% for a 36-month P2P loan and up to 45% for a four-month institutionally backed loan, according to the U.S. SBA. This is compared with an interest rate of less than 5% for industrial and commercial bank loans.