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A Financing Alternative: Non-Bank Lenders

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A Financing Alternative: Non-Bank Lenders

By NicoleD
Published: November 24, 2010

Due to the credit crunch, small businesses and other borrowers have struggled to secure financing, and as a result hopeful borrowers are considering other options besides traditional banking institutions. Read on to learn more about non-bank lenders and some points to consider when borrowing from them.

Small Business Lending at a Glance

Though government agencies generally do not make loans directly to business owners, the federal government provides a guaranty to banks and lenders for money lent to small businesses. Popular small business lending outlets include community and national banks, credit unions, state and local government agencies and local non-profits, alternative lenders such as cash-advance or payday lenders, and non-bank lenders.

What is a Non-Bank Lender?

A non-bank lender is a financial institution that extends credit, or loans. Typically, non-bank lenders provide services to businesses, not individuals, and they do not hold depository accounts.

Points to Consider When Borrowing from Non-Bank Lenders

If you are looking for small business financing there are important factors to consider, no matter who your lender is. Read the article The Fine Print: Business Loan Terms to better understand your rights and responsibilities as a lender.

As with any lending arrangement, a loan through a non-bank provider will have advantages and disadvantages:

Advantages

  • Non-bank lenders often specialize in certain industries or business models, such as high-growth startups or franchises.
  • Non-bank lenders tend to facilitate loans that may seem risky to other lenders, including banks.
  • Compared to other lenders, non-bank lenders tend to offer flexibility in terms of how they evaluate collateral and cash flow


Disadvantages

  • Non-bank lenders tend to assume;riskie- loans. Interest rates and loan conditions may be higher to help absorb some of that risk.
  • Because non-bank lenders are not held to the same regulatory requirements as banks, they have more flexibility in their operations. Borrowers should consider that as a result, that there may not be looser standards over disbursement timelines and loan terms.
  • Non-bank lenders may not be as well-known as their big-bank counterparts. To ensure that you are dealing with a reputable lender, be sure to thoroughly research the business. For tips, read Researching a Business: Parts One and Two.


Locate Non-Bank Lenders
Some non-bank lenders have preferred lender status with the SBA. You can locate lenders in your area, including non-bank lenders, by contacting your local Small Business Development Center.
This list is not comprehensive, so inquire in your community as well.

Additionally, the advice in Five Tips for Finding Small Business-Friendly Banks also applies to all borrowers searching for financing.


Related Resources

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Comments:

Its sad I have switched banks twice in the last four years. You would think that if you are a small business who has at least $30,000 a month flowing through the bank you would be able to secure a loan from the institution you bank with. "Not". No one is lending to small business owners that are truely small businesses. They are using your money to get what they can from Larger insititutiion but if you walk in and ask to take all of your money out of the bank they will tell you that you have to wait 30 - 60 days to get all out. Interest rates are so high from alternative lenders and they play games with your money.
I applied to the assistance program for companies affected by recession. Was rejected. This after the bank killed off my request in 2007 for start up. So I invested $70,000 plus and the recession all but killed us off. They said to show seriousness in my plan by self-investing before they could grant a loan. I applied as noted to everyone for help. One response stated I needed to be either minority or immigrant owned business to get anything. Private sources only wanted 'up front' fees, as much as $1,200 to have them match me with a lender (Private Venture). Different levels of membership depends on how much u pay them, they ALWAYS state nothing has been matched yet, but if you 'up' your membership, your odds are better and should be no time before they match you. Its all a scam. The government tells the public about all these programs and when you get into it, find all these red tape strings attached. I did everything I was told to do. This past year, I wanted contracts for work, not handouts. But that even is 'politics' directed. 8A was started to help, now it makes companies like mine almost extinct. My company helps so much in greass rooots community levels, no body cares unless your the big government connected or minority/immigrant 8A listed. If not...then explain where my check or work contract is?????? Its all 'ACT' like we care about the public, but its all a politics game.
@jseowriter, That is not 100% true. Some of the non tradition lenders can actually offer low interest rates. Since it is member-run, a credit union will also focus on services and savings for their own members. This objective generally leads to lower interest on loans and credit cards, lower cost services, and higher interest rates on savings compared to those of banks.
The problem is that while a business owner might be able to get a loan from a non-bank lending, the interest rate will be to high for the loan to make sense. - Taco ---This post was edited to remove a commercial link. Read our discussion policies for more Community best practices.

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