Where to Go When the Bank Says No

A recent study by the Federal Reserve Bank of New York found 90 percent of small businesses have had their loan request rejected by their bank in the past year. It’s an extraordinary—and alarming—number given the role small businesses play in the national economy.

Access to capital is a challenge for most small business owners. Some would blame this entirely on the traditional banks alone, but it is not entirely their fault. The processing and profitability for most small business loans are simply not practical for their type of organization. I firmly believe it is up to the borrower to find the right type of organization that is able to accommodate for their financing needs. This is easier said than done.

It really comes down to established routines: the small business owner that is in need of financing will go to the partner they have been banking with their whole life. When they come in to sit down, show their credits, time in business, and monthly revenues. Unfortunately, more often than not there is something about the borrower that doesn’t quite meet the bank’s criteria and they have to say no. So, what do business owners do after the bank says no?

Alternative lending is not known to a lot of small business owners. However, this type of financing provides the next best thing for small businesses. These lenders offer specialized loan products that range from equipment financing to factoring, term loans, and much more. Most alternative financing is designed to provide a short-term influx of cash, which can help small businesses get the working capital they need.

Let’s take a look at these alternative lenders. After our recent recession, banks were quickly fleeing from the small business loan market, leaving a huge void for Main Street business owners. So, unless you were looking for a million dollars or more, getting a business loan proved to be quite difficult.

Fortunately, our country is full of entrepreneurs and innovators, so when opportunity strikes we seize the moment—head first. Alternative lenders are now filling this gap that traditional banks left void. These new “alternative” lenders are figuring out new ways to underwrite for small businesses.

Related Article: An Overview of Alternative Financing

Unlike traditional banks, alternative lenders must acquire capital before they lend it to you. This does reflect a higher interest rate than a traditional loan from your local bank. Nevertheless, these interest rates are more favorable to using personal or business credit cards to access additional capital. And, access to capital—even at a premium—often makes the difference between success and failure.

The specialized nature and higher cost of alternative financing make it more important than ever before that small business owners go into the process more informed about available options, costs, and with more understanding regarding what’s happening within their businesses. With that in mind, here are a few things to consider when taking advantage of alternative lenders to secure capital.

More Competition, Better Service

Since 2009, the alternative lending space has experienced a large influx of players into the industry, usually finding different and unique ways to underwrite loans. With more competitors in the space, alternative lenders will need to provide better service, and work on creating attractive loan options for small business owners.

Plan Ahead

There are a lot of situations where your business will be healthy and doing well, but the owner doesn’t feel like they need financing at the moment. But when an unfortunate situation happens and all of a sudden the business is in a bad spot, it can be hard for them to get financing because most of the lenders are seeing the same unfortunate situation on paper.

Ultimately, when you have got a healthy business, you have a greater chance of finding access to lines of credit or other options similar to that. Planning ahead at this point helps alleviate anything unexpected down the road.

Do Your Homework

Be open to go with one of these newer alternatives, but you’ll want to do your homework first. You will want to know whom you’re talking with and whom these folks are. Make sure you look at and understand their reviews but really understand the costs behind your loan options.

So, just because you have been turned down by the bank doesn’t mean you are left empty handed. There are a lot more options today for small business financing than just a few short years ago. What’s more, competition between alternative financing is making rates and other terms more and more favorable for small business owners. Of course even alternative lenders are interested in how long you’ve been in business, your personal credit, and your industry—they are simply willing to accept more risk. You should also be aware that the cost of capital could be a little higher with an alternative lender. Consider it the cost of being a little more risky loan than what your local banker might accept.

Author: Cole Pedersen serves Lendio, the nation’s #1 marketplace for small business loans, as an SEO marketing guerilla who administers white hat SEO techniques to achieve an artful level of status in the plex of the algorithm. You can reach Cole on Twitter at @colebearski.