Thirty years ago when a small business needed to borrow money an owner simply went to their local community bank and asked for a loan. Often the loan was made on a handshake and the borrower either paid it back in a lump sum or by making term payments. The rule of 78s was used to compute interest on a 360 day basis. The process created a “one size fits all” loan. Today’s world is quite different
Today’s world is quite different, as big banks have consolidated and many community banks have disappeared. FICO credit scoring and loan modeling has mostly replaced the relationship based loan officer. But there is good news! Both banks and non-bank lenders have a nearly an endless number of financing tools available. In today’s financial market, non-bank lenders outnumber traditional banks and often can provide terms and flexibility that traditional federally and state regulated banks cannot.
Non-bank lenders can often be as competitive as bankson price, and typically have highly specialized financing products that precisely fit a borrower’s specific needs. Examples include equipment leasing companies, factoring companies, non-bank SBA lenders, and investment house companies that loan money to small businesses in addition to their primary mission of selling and managing investments. In many states even non-profit credit unions that traditionally only served consumer members are now permitted to make commercial loans.
Why seek out a non-bank lender instead of a bank?Banks will always have their place in the business finance market, but since they are either regulated by the state or federal governments, they often are unable to lend money to a business that has not been profitable, may not have adequate collateral coverage, or because the business is growing too fast to make a traditional loan repayment. Non-bank lenders are not regulated so they have a certain amount of flexibility that banks do not have. For example, a bank may weigh historical profitability of a company equal to the value of loan collateral and the company’s ability to repay, whereas a non-bank lender may be able to overlook a bad year or two and rely on cash flow projections and the value of the collateral, while overlooking the historic profitability.
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low as possible and mitigates risk to the business and owner who has probably personally guaranteed the loan. Financing accounts receivable can often be done by an A/R lender, and financing the combination of inventory and A/R by an asset-based lender. There are non-bank lenders who specialize in financing purchase orders. Import and export financing is also available, as are International Irrevocable Letters of Credit. When financing long-term assets like real estate, there are many options available regarding rate, terms, and length of loan.
Most non-bank lenders are reputable; but remember because they are not regulated there are some that are unscrupulous. Read any agreements carefully before you borrow from a non-bank lender and find out before the loan is made what collateral will be used to secure the loan.