Getting funding for your business is a challenge. For example, many banks won’t provide loans to small businesses or brand new startups of any size. This forces many small business owners to seek out alternative business lenders. However, you need to ask questions so that you find the right lender and avoid paying outrageous fees. Here are seven questions you should ask before working with an alternative business lender.
Who is Your Ideal Customer?
This gives you an idea of whether or not you’re a fit with their target lending customer profile. It is a good way to determine if their products truly align with your needs. On the flip side, if their ideal customer is very different from your type of business, they may not be a good source of advice even if they have low interest and fees.
What Qualifications do You Use?
No lender is going to share all of their underwriting criteria, but they should be able to share the big ones. This list can include credit history, outstanding liens, debt level, and how long you’ve been open. If you don’t meet their main criteria, know that there are other options. Services likes Advanced Point, for instance, will be willing to look beyond your credit rating and consider other factors that will prove the viability of your business and your ability to repay the loan.
What Percentage of Borrowers Come Back and Renew the Loan?
This information allows you to know how often people have to roll over the loan and pay the associated fees plus additional interest. A high renewal rate means you’re almost certain to get trapped in an expensive debt cycle.
What Percentage of Clients Move on to Bank Financing?
Ideally, a fair number of their lenders are able to move into more affordable, lower interest loans with a longer amortization period. When this metric is high, the alternative lender is truly a bridge to success for their clients.
What are the Prepayment Penalties?
Ideally, your business will increase its revenue and be able to pay off the loan ahead of schedule. However, the lender may not allow you to do this. Some lenders force you to continue making hefty interest payments. Others theoretically let you pay off the loan but only if you pay a heavy prepayment fee. Don’t worry about modest prepayment fees. However, if the penalty is a sizable fraction of the loan amount, don’t take out a loan with the company.
What is Their Lien Structure?
Alternative lenders often manage their risk by applying a lien against the assets of the company. It is reasonable for a lender to have a lien against the equipment or inventory they sold you. Then, if you don’t make the payments, they can take it back. Problems arise when the company issues a blanket lien against all of the company’s assets. First, this makes it difficult to take out another loan with another lender.
What Services do They Provide?
Any lender is going to offer loans. However, that’s the least they can do. Does the lender offer advice to startups or counseling for borrowers beyond helping you select a loan? It really isn’t to your benefit when their advice focuses on how much you can borrow, especially if they steer you to a loan with high interest and fees. Instead, can they give you advice for improving cash flow so that you don’t have to roll over the loan?
The best alternative lenders recognize that they are a means to an end, a bridge for struggling businesses that want to get back to profitability. Ask the right questions so that you can find these lenders.