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Traditional vs Alternative Lenders: What’s the Difference?

By Matthew Gillman, Business Financing Expert & SMB Compass Founder

Small business owners have a myriad of options to fund their business. They may seek for a business loan, a line of credit, or equipment financing–each designed to meet specific capital needs. 

But on top of researching the best loan options for your healthcare practice, you also need to consider the lender you’re going to work with. Generally, most business owners would apply for loans from banks and credit unions, but there are other lenders out there who offer more flexible financing that comes with better terms and interest rates.

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Each type of lender has its own strengths and weaknesses, so it’s important to identify which one is right for you. So before signing an agreement with any lender, have a look at the key differences between traditional and alternative lenders. We’ll discuss the differences between traditional and alternative lenders and help you decide which one is right for you.

What is a traditional lender?

Traditional lenders refer to banks and credit unions that lend money to both small and large businesses. They are called “traditional” because they were the only sources of funding for entrepreneurs back in the day.

Traditional lenders are usually more willing to lend to people with good credit. They also tend to offer lower interest rates and longer repayment terms to borrowers who are creditworthy. However, many new business owners struggle to apply for loans from traditional lenders mainly because they have stricter qualification requirements.

To qualify for a business loan from banks, you need to have a business and personal credit scores of at least 80 and 720 respectively.

What is an alternative lender?

Alternative lenders are financial institutions that provide loans to businesses that may have difficulty obtaining financing from traditional sources. They are usually more willing to lend to people, even those with bad credit. They even offer next-day loans to small businesses. 

However, this convenience comes with higher interest rates and shorter repayments terms. Oftentimes alternative lenders will require collateral to minimize their risks of loaning you money. This collateral may come in a form of mortgage, invoices, or business equipment. 

There are a number of alternative lending platforms available online, each with its own specific focus and target market. Some common types of alternative lenders include peer-to-peer (P) platforms, merchant cash advance providers, and invoice factoring companies.

When to work with a traditional lender

Seeking financing from traditional lenders such as banks and credit unions makes the most sense for borrowers who have been around for more than three years, have good personal and business credit scores, and have an annual revenue of at least $250,000. 

In return, these borrowers may get access to capital with more favorable terms and rates. In fact, the annual percentage rate (APR) being offered by traditional lenders goes anywhere between three and eight percent—much lower than what alternative lenders are able to give.

You may enjoy these perks when you work with a traditional lender. However, you must remember that getting funding from banks or credit unions often takes time to process. You need to apply for small business loans from traditional lenders anywhere between a few weeks to a few months to secure capital.

When to work with an alternative lender

Alternative lenders (or online lenders) offer various financing options for small businesses and startups who don’t have the qualifications to get loans from traditional lenders. Alternative lenders usually have more relaxed qualification requirements, allowing many new businesses to access capital in as fast as 24 hours. This quick access to funds allows you to have the money at a time you need it most.

To reduce the lender’s risks of releasing funds to relatively new businesses, they require borrowers to put up collateral or have a consignee for their loan application. This serves as their safety net in case the borrower defaults on their alternative loan.

Aside from that, alternative lenders have high APR. The APR is determined based on a number of factors, such as the type of financing you’re trying to get, your credit score, type of business industry, number of years your healthcare practice operates, and the lender you’ll be working with.

The Takeaway 

The main difference between alternative and traditional lenders is speed and flexibility. Alternative lenders typically use new technology to provide financing to small businesses faster than traditional lenders would. They are often able to offer funding in a matter of days, and they tend to have more flexible underwriting standards than traditional banks.

Traditional lenders, on the other hand, are typically brick-and-mortar banks. They may take longer to make lending decisions, and their underwriting standards may be stricter. However they offer lower interest rates and better terms overall.

So how do you know which type of lender is best for your healthcare practice? It depends on your needs and circumstances. If you need financing quickly and don’t mind paying a higher interest rate, an alternative lender may be a good option. If you’re looking for the best terms possible and you meet their stringent qualifications, a traditional lender may be a better choice.

Nevertheless, it’s important to do your research and compare offers from both lenders. Remember, there’s no one-size-fits-all answer when it comes to business financing. What works for one business may not be the best option for another. Choose the loan that makes the most sense for your business and gives you the best chance of success.

About the Author

Matthew Gillman is a business financing expert with more than a decade of experience in commercial lending. He is the founder and CEO of SMB Compass, a specialty finance company providing education and financing options for business owners. 

Healthcare Business Today is a leading online publication that covers the business of healthcare. Our stories are written from those who are entrenched in this field and helping to shape the future of this industry. Healthcare Business Today offers readers access to fresh developments in health, medicine, science, and technology as well as the latest in patient news, with an emphasis on how these developments affect our lives.

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