Some small businesses may have a more difficult time receiving loan approvals from traditional lenders due to the length of time in business, the size of their requested loan, or other factors. For these reasons, many business owners are starting to look to alternative lending to help them access capital. In this podcast hosted by Dun & Bradstreet, an alternative lending expert explains the basics of alternative lending, how it may be beneficial for your business, and how to prepare your startup or small business for future funding.
Featured Guest: Brett Baris, Founder & President of Credibility Capital
Alternative Lending and Its Evolution
Banks and other traditional sources of lending are usually the first thing people think of when they think of getting a loan. Now, however, alternative lending is becoming a more prevalent source of funding, and businesses are starting to take notice. Starting in 2006, alternative lending focused more on consumer lending. But, over the last couple of years it has expanded into other classes, including student lending, real estate lending and small business lending.
There are two main reasons for why alternative lending has become prevalent:
1. Advances in technology allow new lenders to find customers, provide services, collect data, and evaluate credit more easily.
2. Low yields across investment classes the past few years have made investors and lending institutions look for loans that may have higher yields, such as small business loans, and these lenders are generally happy to fund loans they believe may have a high yield.
About Credibility Capital
Credibility Capital is an alternative lender that focuses on small business loans. Most of its customers are business owners who were overlooked by banks. These businesses were rejected by a bank usually because of the size of the loan they were requesting, not because of their credit quality, says Baris.
Credibility Capital focuses on “prime” businesses that should be receiving loans (but aren’t) because they are looking for loan amounts (usually ranging from around $10,000 to $250,000) that banks will usually not provide.
Some Ways Credibility Capital Evaluates Businesses
Credibility Capital uses more traditional metrics to evaluate the businesses that apply for funding. This evaluation allows Credibility Capital to determine how efficient a business is and how it uses its finances. An evaluation generally looks at:
- Credit scores, both commercial and consumer credit
- The overall time and length the company has been in business
- How the company is growing or plans to grow
How to Help Prepare for Long-term Funding Success
To plan for funding, there are a few key things an entrepreneur should know and consider. For new businesses, owners should consider whether it is better to take on a debt or an equity investment. Owners will also have to keep in mind that as a new business, they may not have much credibility. It can be difficult for lenders to assess new businesses looking for a loan, because these businesses usually lack a business credit history. Both business and personal credit scores can be taken into account when applying for a loan, and often, some credit scores can be indicative of the future performance of a business. Entrepreneurs should consider starting their business credit right away, so that when they are ready for a loan, they can help prove their credibility to their lender.
It is also important to understand the financial needs of the business. Lenders will probably want to know why the business needs the amount it is seeking. Owners should be prepared to explain why they are requesting a certain amount and should have research or documents to show the lender.
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Photo Credit: GotCredit, Flickr