Maybe you’ve bootstrapped your business up to this point, launching your company using your own savings, credit cards, and loans from friends and family as you’ve worked to become profitable. Now you’re ready to take the next step and secure outside financing so you can continue to pursue the opportunities that will help your business grow. But where should you look for this financing? Though alternative lenders have become quite plentiful, you may still be better off choosing a traditional bank or credit union when applying for a business loan.
What’s the Definition of an Alternative or Traditional Lender?
Alternative lenders are typically private organizations that provide loans through online platforms that bring together professionals seeking business financing with loan investors pursuing yield-generating investments. The alternative lending market has skyrocketed in recent years, with total transaction value projected to reach more than $344 billion worldwide in 2022 and more than $383 billion by 2026.
Traditional lenders for businesses include banks and credit unions. One might think that big, national banks would be the most active in this traditional lending space. However, according to the U.S. Chamber of Commerce, community banks are actually funding 60 percent of small business loans.
While the approval requirements for a loan from a traditional lender may be more stringent than that of an alternative provider—and the process may move a bit slower—the other benefits of choosing a bank or credit union for your business financing needs can be substantial. Just consider these reasons using a bank is better than alternative financing:
1. Banks generally offer lower rates and fees for business loans.
The underwriting process for a business loan through a bank is more robust than that of most alternative lenders. They will probably consider your credit score, cash flow history, projected earnings, and other debts when evaluating your application. However, if you qualify for a loan, the bank will likely offer you a lower interest rate than you could otherwise obtain, especially if you have good credit and are already doing business with the bank you’ve approached for financing.
You’re also likely to secure that bank business loan for a lower fee. Alternative lenders often charge fees as high as 7 percent to 10 percent of the loan total, substantially increasing the annual percentage rate (APR) associated with the financing. The lower your credit score, the higher that fee is likely to be.
2. Banks generally offer longer terms for business loans.
Though you may be able to secure the same amount of business financing through a traditional bank as you could through an alternative lending source, your term for the bank loan is likely to be longer. This means your monthly payment should also be smaller, and thanks to the lower interest rate, your loan won’t wind up costing you more over the long run. Smaller monthly payments enable you to put more of your profits back into growing your business: the reason you wanted to secure a business loan in the first place.
3. Banks typically offer a greater variety of financial products.
Traditional banks don’t just offer basic term loans. If you choose one that specializes in financing for entrepreneurs—like Sunwest Bank, which was founded in 1969 to provide financial services to small- to medium-sized businesses, privately held corporations, family offices, and real estate developers and investors—you may have access to revolving lines of credit, asset-based lines of credit, equipment loans, construction loans, recapitalization loans, and more.
4. Banks can also help you apply for a Small Business Administration (SBA) Loan.
Some traditional banks participate in the SBA’s guaranteed business loan program. SBA business loan options include the SBA 7(a) loan, the SBA 504 loan, and the SBA microloan (for loans up to $50,000). Because they’re guaranteed by the SBA, the risk to the bank is lower and securing approval may be easier for some business owners. The rates and fees for an SBA-guaranteed loan are generally comparable to those of the bank, but lower than those of alternative lenders.
5. Banks offer greater financial security than alternative lenders.
Traditional banks have been around for centuries, while the alternative lending market is still fairly young.
Carson Lappetito, President of Sunwest Bank offers this advice, “As a business you want to secure financing with a stable institution, especially during times of uncertainty. The US economy is at a tipping point, and rougher times may be ahead for businesses – all of which makes it imperative to secure financing through a stable banking institution.”
Most banks and credit unions are supervised by the FDIC, which keeps tabs on the financial institutions’ operational safety and soundness. Alternative lenders in the U.S., on the other hand, are not yet subject to the same federal regulation. As such, it’s more likely that an alternative lender will go out of business—which could negatively affect your business operations.