8 Questions Business Owners Should Ask Alternative Lenders

8 Questions Business Owners Should Ask Alternative Lenders

At some point, most small business owners will need additional cash flow for their businesses, whether it’s for building expansions, covering seasonal payrolls or simply purchasing new pieces of equipment. The first step for many business owners is often seeking a traditional loan from a bank or credit union; however, there are many cases when even a successful, growing business has trouble getting funding in a traditional manner. In this case, the next step would involve seeking alternative sources of funding.

Hundreds of “non-traditional” lenders have sprouted up in the last five to seven years to fill this market need, creating more options than ever before. As this is a relatively new industry, alternative lending is unknown to many small business owners, or is a concept they don’t fully understand. When the lack of education about these options is coupled with an immediate need for capital, small business owners might end up in over their head. While some lenders and brokers work in the best interest of the business owner, there are also “loan sharks” seeking to take advantage of desperate business owners looking for fast cash. Loans from these dishonest lenders have led to bankruptcies and closures of once prosperous businesses that were simply unaware of the risk when they accepted deals they were unable to pay back.

Unfortunately, as a small business owner, many of these bad actors are looking to take advantage of you. By simply existing for more than one year, you are a key target and are likely to be bombarded with solicitations from unethical brokers and funding companies looking to gain hefty commissions from overpriced deals. If you are in the market for capital, it’s very important to cut through the clutter and find the option that is best for the health of your business.

Before taking out a loan from any alternative lender, take the time to do some research on all of your options. Treat this process as if you were looking for a long-term business partner rather than just a loan. Since there are few legal requirements for transparency in the alternative lending space, it is critical that you seek out clear answers to the following questions:

  • What fees are involved?
  • What happens if I default?
  • What do I need to get funded?
  • What kind of lender are you? Are you a broker, direct lending company or financing facilitator?
  • Will you file a UCC on this funding?
  • Are there limitations on how I use the money?
  • What are the repayment terms?
  • What if I need more funding?

Use these questions to develop a better understanding of what your business relationship would look like if you took a loan from each lender you are considering. You want to work with a lender that has a real interest in helping your business grow in the years to come. If an alternative lender is trying to take advantage of your business, they will likely try to dodge these questions or give you unfavorable answers. If they are truly transparent and open about their lending protocol, it is a good sign.

Knowledge puts you in the driver’s seat when making funding decisions to help your business survive and thrive in long term. If you fully understand all of your funding options before you make any choices, it will help you successfully navigate the alternative lending market.

Jim Salters is CEO and co-owner of The Business Backer. Through mission-driven leadership and innovative strategies, he has repeatedly generated 10x growth and profitability leading early stage companies.

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