Visit Our Learning Center - Understand The Process Before Borrowing

Bank or Non-Bank Funding

They Both Lend Money

Many business owners only know of banks or credit unions as places that lend money. That's because over the years most people think of borrowing money for their business is the same as borrowing money to buy a house: through a bank or credit union. It's not like that any more. There are many private lending companies that are just as active making loans, leasing equipment, and investing in companies just like yours. Banks and non-banks have pro's and con's because they have completely different rules and regulations. What works for you as a funding source may not work for the next person so the purpose of this section is to describe both sides of the industry. Do your own research to fully understand the advantages and disadvantages.

How Much Time Do You Have?

Banks and credit unions have some of the lowest borrowing rates around but it takes time (sometimes weeks) to get the funding. Many banks will want to get an appraisal of a borrowers real estate (as a means to secure the funds they are lending) and will often ask for audited financial documents of equity and company assets. This is normal and it's to help the lender decide if you are worth the risk. It is also because banks are regulated and must follow guidelines. That analysis process can, in many cases, take weeks. Many business owners don't have that kind of time because they have an immediate project or need that must be dealt with. If you have a little extra time to get a loan through a traditional bank then that is where you will find lower interest rates and longer repayment terms. If you need money immediately then a non-bank funding source may have your need completely handled in a matter of 2-3 days.

Non-Bank Funding: Speed Costs Money

Have you ever needed a plumber immediately? You would usually get a much higher quote for instant service instead of getting on the plumbers schedule. The same kind of idea works for the non-bank funding industry. Speed costs money and many non-bank lenders can have funds sitting in your bank account in just a few days, sometimes even faster. If that type of response time is what you need then just expect to pay a little more for that kind of convenience. These days anything you need done immediately comes at a slightly higher price because the company you want something from immediately knows there is urgency involved and they always charge more for that speed. Many non-bank lenders also make funds available to people with less than perfect credit scores and that too comes with a higher fee simply because there is a risk involved in getting repaid. Tip: When talking with a non-bank lender be sure they outline all of the items that make up the fee so you have a complete picture of the cost of the money.

Wait, It Costs Me How Much?

Here is where the rubber meets the road. Traditional banks are the best route to take for low-cost money. Maybe 7% interest with no fees? That's cheap money! But if you need funds and a bank can't help you (or if you don't have time) then non-bank lenders may save the day. They charge you a "fee" for borrowing money and not an interest rate. Those fees can range from 11% to 27% or higher, based on the amount you are borrowing and your credit score. Again, the funding sources charge a fee not an interest rate. So if you borrow $50,000 and the money has a fee of 21% then you are actually borrowing $60,500. You may find a lower rate when a lender runs a special so ask the funding source for special offers (yes, from time to time they do happen!) Remember, a bank may lend at a 7% interest rate and a non-bank at 21% fee. Apples and oranges so do the math to understand the pro's and con's of each.

Unsecured Loans Still Exist, Sort of

In the old days (20+ years ago) unsecured business loans were popular. People could walk into a bank, sign a piece of paper, and in a couple days the money is ready. Regulations have put a little chill on unsecured loans with banks because there was a lot of abuse and fraud (remember 2008-2009?) so that had to be tightened up. However, many banks still have unsecured loans available, you just have to ask for them. Often times they will make a business line-of-credit available on an unsecured basis. Non-banks almost always make their loans on an unsecured basis, and that's a plus. However, nothing is ever truly unsecured - if you default on any loan chances are good you'll find yourself in court and a judgement can be collected in many ways.

Banks Need Your Business Too

A bank is no different than any other business. The goal is to show a profit, keep employees on-staff, and grow. It is very wise to establish a relationship with your local bank because as they get to know you they can often loan you money on a short term basis rather quickly. Put yourself in their shoes for a moment. Would you loan money to someone you did not know? The same applies with a bank or credit union. The relationship does matter and even though banks and credit unions are heavily regulated, they can still loan money somewhat quickly to people that fit within their guidelines. The more they know you and understand what you do the easier it will be to talk about a loan.

You Decide: Bank or Non-Bank

In summary: Banks have a lower cost-of-money but take longer to lend and often require more paperwork. If you have a blemish on your credit report you might not qualify for a bank loan (ask your bank.) Non-banks can lend in as little as 1-3 days, have very little paperwork, don't rely heavily on your credit score, but charge a fee which could be from 11% to 27% or higher (depending on your credit and financial position.) One route takes time and costs less, the other route is extremely fast with less paperwork, and costs more. Make a level-headed decision and engage!