When it comes to securing funding for your business, there are two main options: traditional banks and alternative lenders. Each comes with its own set of advantages, target audiences, and application processes. Choosing between the two depends on your business's financial profile, needs, and timeline. Here, we'll explore the differences between these options, the typical loan application processes, and the benefits of each. We’ll also dive into how alternative lenders like Berkman offer unique funding solutions tailored to small businesses.
Major Differences Between Banks and Alternative Lenders
Traditional Banks: Banks are well-known, established institutions that typically offer loans with competitive interest rates. However, they also have stringent qualification requirements, including high credit scores, solid financial history, and often years of business operation. Banks can provide large loans, making them ideal for established businesses with strong financials.
Alternative Lenders: Alternative lenders, such as American lenders, provide a more accessible route to funding. These lenders often have more flexible requirements, making them popular among small businesses, startups, and companies with lower credit scores or shorter operational histories. They also offer faster application processes and approval times, making them an attractive option for businesses needing quick access to capital.
Who Typically Seeks Funding from Banks vs. Alternative Lenders?
Who Turns to Banks for Funding?
Businesses with strong credit profiles, longer operational histories, and stable cash flows usually turn to banks for funding. Banks favor applicants who have:
High credit scores (usually above 680)
Detailed financial documentation and tax records
Years of profitable operations and strong cash flows
Banks are likely to offer more favorable interest rates to these established businesses, but they also require extensive documentation, which can make the process longer and more complex.
Who Chooses Alternative Lenders?
1. Small Businesses and StartupsNewer businesses or those with limited financial histories often don’t meet banks’ strict requirements. Alternative lenders are more flexible, focusing on monthly revenue rather than just credit scores, making them a good fit for these businesses.
2. Businesses with Lower Credit ScoresWith credit score requirements often as low as 530, alternative lenders are accessible to businesses with imperfect credit. Instead of just looking at credit, they consider revenue and cash flow, giving more companies a shot at funding.
3. Businesses Needing Fast FundingCompanies facing urgent needs—like unexpected expenses or quick growth opportunities—choose alternative lenders for their speed. With quick approvals, funding can happen in days, unlike the weeks banks often take.
4. Seasonal or Cyclical BusinessesRetailers, agricultural businesses, and others with seasonal revenue choose alternative lenders for flexibility. Products like merchant cash advances can help bridge cash flow gaps during off-seasons or prepare for busy times.
5. High-Growth CompaniesBusinesses scaling quickly often need immediate funds to seize new opportunities. Alternative lenders meet this need with fast, accessible financing without heavy documentation.
6. Businesses with Limited CollateralWhile banks typically require collateral, alternative lenders may not or are more flexible, offering options like merchant cash advances based on sales. This is ideal for companies without large assets.
7. Entrepreneurs Seeking Simple ProcessesWith straightforward online applications and limited paperwork, alternative lenders provide a hassle-free option for busy business owners.
Loan Application Process: Banks vs. Alternative Lenders
Banks
Documentation: Requires extensive documentation, including tax returns, profit/loss statements, and cash flow records.
Lengthy Approval: Banks conduct detailed financial and credit assessments, which can take weeks or months.
Approval Rates: Approval depends heavily on creditworthiness, financial stability, and business history, making it challenging for newer or smaller businesses to qualify.
Alternative Lenders
Quick Application: Typically an online application process that takes minutes.
Revenue-Based Assessment: Rather than traditional metrics, lenders often prioritize monthly revenue and cash flow.
Fast Funding: Many alternative lenders offer approval and funding within days, which is ideal for time-sensitive needs.
Loan Products and Services Offered by Alternative Lenders
Alternative lenders offer diverse funding options tailored to various business needs:
Merchant Cash Advances: Upfront capital repaid through a percentage of daily sales.
Short-Term Loans: Loans with terms up to 18 months for immediate expenses.
Lines of Credit: Revolving credit to access funds as needed.
Equipment Financing: Funding specifically for purchasing equipment.
Invoice Financing: Advances based on outstanding invoices.
Typical Loan Amounts: Alternative lenders offer loans ranging from $5,000 to $1,000,000+, depending on monthly revenue and business profile.
Benefits of Funding from Banks vs. Alternative Lenders
Bank Benefits
Lower Interest Rates: Generally more competitive, saving money over the life of the loan.
Larger Loan Amounts: Established businesses may receive larger loans for significant expansions.
Longer Repayment Terms: Banks typically offer longer terms, easing monthly payment burdens.
Alternative Lender Benefits
Easier Qualification: Lower credit score requirements and flexible criteria make it accessible to more businesses.
Quick Approval and Disbursement: Ideal for businesses needing immediate capital, as funds are often available within days.
Diverse Funding Options: From merchant cash advances to short-term loans, alternative lenders offer solutions for unique financial needs.
Qualifying for Funding at Berkman
Berkman Financial simplifies funding for small businesses with accessible qualification criteria:
Minimum Business Age: At least 6 months in operation
Monthly Revenue: Minimum of $10,000
Credit Score: Starting at 530, with options available for those with lower scores
Over the past decade, Berkman Financial has provided over $650 million in funding to help small businesses succeed. Our commitment to supporting growth and empowering small businesses sets us apart from traditional lending, allowing us to offer customized solutions that support business goals and financial stability.
Whether you need a traditional bank loan or are considering alternative funding, the best choice depends on your unique financial situation and timeline. Berkman is dedicated to helping businesses thrive with fast, accessible funding options tailored to their needs.
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