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As small businesses may encounter difficulty securing funding by going the traditional route, nonbank lenders offer an alternative loan option with more flexibility. — Getty Images/Dimensions

There are many options for financing a small business, from investors to loans to credit lines. Nonbank lenders can be a helpful avenue when securing funding when a business doesn’t qualify for a traditional bank loan or doesn’t want to borrow from a bank.

A nonbank lender, or “nonbank bank,” is a financial institution that lends money but doesn’t operate with a full banking license. It does not offer deposit, checking, or savings services.

As small businesses and first-time entrepreneurs may encounter difficulty securing funding by going the traditional route, nonbank lenders offer an alternative loan option with more flexibility. Here’s what you need to know about borrowing from an alternative lender.

[Read more: 6 Popular Financing Options for Your Startup]

Pros and cons of non-bank lenders

Pros

  • Easy application. The majority of nonbank lenders have perfected a streamlined approach to lending applications. As long as you have your basic business information and financial data on hand, you can expect to finish your business loan application in less than an hour. Some platforms or lenders take as little as 15 minutes.
  • No-credit financing. If you’ve applied for and been denied a loan at a traditional institution, consider using a nonbank lender. Because nonbank lenders have more flexible requirements, there’s a high chance they’ll grant a funding request for businesses or individuals with less-than-stellar credit.
  • Quick access to funds. Not only is a nonbank lender’s application process quick, but approved borrowers can expect access to funds in as little as one day.
  • No spending stipulations. Unlike traditional banks that require explicit spending for an allotted loan, nonbank lenders give borrowers the flexibility to put the loan to whatever helps the business grow more.
  • Build a banking relationship. Working with a nonbank lender affords you the opportunity to cultivate a symbiotic relationship. By timely repaying debt and continuing a positive relationship, you may secure lower interest rates in the future.

Cons

  • The lender may go out of business. Nonbank lenders remain relatively new to the financial industry and there is a risk of one going out of business during a partnership. Like any business relationship, entrepreneurs should evaluate lenders by how long they’ve been in business, who their backing financial institution is, customer reviews, and more before signing a contract.
  • No guarantee of an early repayment discount. Though it varies by lender, some nonbank lenders won’t give businesses a discount even if they make payments earlier than requested.
  • Hidden fees. Before signing a contract, look for miscellaneous costs like disbursement or repayment fees and ask your lender to disclose any and all fees charged.
  • Risk of high interest rates. Interest rates with nonbank lenders may end up higher than what you’d receive through a traditional bank. While that’s not always the case, entrepreneurs should have a firm handle on their finances to understand how a higher interest rate impacts their ability to pay back a loan if unforeseen circumstances occur.
  • Large loan size. Pay attention to minimum loan requirements. Larger startups, or small businesses with a large cash flow, may enjoy a minimum loan of $50,000. However, small teams may want to avoid taking on that much debt if they only need a few thousand dollars to bridge months between client payments.

[Read more: Choosing the Best Funding Option for Your Business]

Interest rates with nonbank lenders may end up higher than what you’d receive through a traditional bank. While that’s not always the case, entrepreneurs should have a firm handle on their finances to understand how a higher interest rate impacts their ability to pay back a loan if unforeseen circumstances occur.

Nonbank lenders for small businesses

The number of nonbank lenders for small businesses continues to grow. Below, discover five options to start your research for the best fit for your financing needs.

  • Fundbox. Offering fast and flexible credit up to $150,000 for small businesses, Fundbox offers lines of credit and term loans to facilitate business growth.
  • Fora Financial. Priding itself on providing “strategic working capital from $5,000 to $750,000 in as little as 72 hours from approval,” Fora Financial offers small business loans and merchant cash advances.
  • BlueVine. BlueVine is a technology company with checking, lending, and bill pay solutions for small businesses.
  • SBG Funding. SBG Funding offers a variety of financing options for small businesses. Its solutions include small business term loans, business lines of credit, bridge capital, equipment loans, invoice financing, and more.
  • Accion. Focused on building a financially inclusive world, Accion creates financial opportunities for underserved and underrepresented small businesses, communities, and entrepreneurs.

If you’re ready to apply for a business loan, either through a traditional or nonbank lender, visit our guide for tips on how to do it successfully.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published May 20, 2022