Considering Alternative Lending? 6 Red Flags to Look For

What is alternative lending and how does it work?

Alternative lending refers to any form of financial help that doesn’t involve a traditional bank loan, such as crowdfunding, equipment financing and invoice factoring, among others.

The term “alternative lending” refers to a broad range of loan options outside conventional bank loans. Alternative lenders also have the advantage of funding in days rather than weeks or months. With a better chance of getting a loan and fast funding, alternative lending can seem too good to be true — and it could very well be if you don’t choose your lender carefully.

“Not all loans are the same,” said Jordan Niefeld, certified public accountant and certified financial planner with Raymond James & Associates. “Institutions make money by lending and [borrowers could have] expensive bills and rack up interest because they didn’t do their homework.”

Alternative lending works in a variety of ways, depending on the lending option you choose. For example, equipment financing is a loan used to purchase equipment your business needs, such as a bakery buying kitchen appliances. When you choose equipment financing, the equipment itself serves as collateral for the loan. 

If you pursue invoice factoring, then you’ll sell outstanding invoices to third parties for immediate cash. The “factor,” or the lender, will usually pay a bit less than the total value of your outstanding accounts receivable and then set about collecting the amounts owed themselves. 

There are many other types of alternative lending to consider as well. In general, however, regardless of the type of alternative loan you choose, these models typically entail shorter lending terms, more flexibility and quicker access to funds. 

Difference between traditional and alternative lending

Alternative lending red flags

If you want to ensure you’re signing with a reputable organization, here are six red flags to watch out for when evaluating potential alternative lenders.

The alternative lender’s website isn’t secure.

Fundamental internet safety means never sending sensitive personal and financial information through an unsecured website. Hunter Stunzi, founder of Advisor.com, told us that a site without a valid secure sockets layer (SSL) certificate, which certifies that private information is transferred securely, is likely to steal your information.

In the alternative lender’s website navigation bar, you should see “https” in the URL, along with a lock icon. This is a quick way to see if a site is secure, Stunzi explained, also advising that prospective borrowers check the site through a program like Norton Safe Web to ensure it’s registered to a verified business.

You can’t find the fine print on the website.

A legitimate lender should include its privacy policy, terms and conditions and other legal disclosures somewhere on its website. Stunzi noted that these items would tell you how the lender plans to use your information before asking you to provide it as well as all the things you are agreeing to when using the website.

If you can’t find this information, you may be unwittingly consenting to your personal data being sold to third parties, resulting in unnecessary and potentially harmful credit inquiries.

The lender won’t disclose the amortization schedule or full loan terms.

One of the crucial considerations when trying to secure a loan is knowing whether you can pay it back. A loan’s terms and amortization schedule will break down how interest accrues, what percentage of your payment goes toward interest and whether there are other fees associated with the loan.

Niefeld said that a reputable lender should be able to give you this information and thoroughly explain what your loan is going to cost you over time, especially if you’re late with payments or you miss payments.

“A lender or broker who is unwilling to disclose and define fees [is a red flag],” added Jim Salters, co-founder and chairman of Quanta HCM. “You absolutely have the right to understand what you’re paying and why you’re paying it. If you feel your requests are being ignored or glazed over, I would find a new lending partner.”

The lender doesn’t have a paper trail.

Any good lender will have some kind of information about themselves readily available online, such as a robust business website, authentic customer reviews and a social media presence. If you can’t find anything to suggest the company has legitimate, current customers, it might be best to reconsider that lender, Stunzi advised. He also noted that a “squeeze page” — a contact form that asks for personal details to access information about the company or its loans — is a warning sign of a potential scam.

The lender wants you to borrow more money than you need.

Typically, having access to more money than you need is a good thing. However, when you’re borrowing, it’s important not to bite off more than you can chew. Salters cautioned against signing with a lender that wants you to agree to a larger loan amount than necessary for your business.

“If a lender or broker is pressuring you to take more money than you need, that is a clear sign to end the transaction,” Salters said. “Larger deals mean larger commissions, while you can end up upside down [on your loan].”

The lender pressures you to sign an agreement right away.

Taking out a loan, big or small, is a serious financial commitment. Before you agree to anything, you should be able to ask the lender as many questions as you need to feel comfortable with the loan’s contract terms and payment schedule.

Stunzi warns that you should walk away if a lending representative tries to rush you into signing paperwork before allowing you to review everything. This is especially true if there are multiple loan options available. A good lender will act as an advisor and walk you through the pros and cons of each before you make a final decision, Salters explained.

“People jump the gun and sign the papers without understanding what they’re getting into,” Niefeld added. “Really understand the loan and your responsibility as the borrower [before you sign]. Be a part of the plan. Don’t be ‘sold’ anything.”

The benefits of alternative lending

If you find a lender that passes the red-flag tests, alternative funding sources can provide your business with significant benefits:

• Easy application process: Alternative lenders aren’t subject to the same regulations as commercial banks, so their application process is often much less onerous.
• Quick loan funding: Most alternative lenders can fund loans within days of applying — if you’re approved. This helps small business owners take advantage of time-sensitive opportunities.
• Flexible repayment terms: Alternative lenders often have more flexibility in how they structure repayment for borrowers.
• Repeat business: Alternative lenders love repeat customers. If you’re approved for a small loan and repay it on time, you’ll have a source of fast funding you can continue to use to help grow your business.

Reputable alternative lenders to consider

If you’re in the market for vetted alternative lenders, check out our picks for the best business loans. We spotlight alternative lenders worth considering that you can research further:

• SBG Funding review: SBG Funding provides a wide variety of loan amounts and rates, including low-interest rates. Additionally, if you have a low credit score, you can still access funding through this lender, which is something you likely couldn’t do via traditional lending. You’ll also experience quick funding and the convenience of an online application. 
• Biz2Credit review: Biz2Credit offers term loans, commercial real estate loans, working capital and Employee Retention Tax Credit loans with transparent pricing and competitive rates. The lender offers quick funding and an online application process.
• Rapid Finance review: Rapid Finance offers quick funding and flexible terms. While the loan rates do depend on your credit score, you likely won’t be turned away due to a bad score. Additionally, the company’s customer service is especially helpful throughout the lending process, and you can access a client portal to track your payments. 
• Crest Capital review: Crest Capital provides quick funding and access to a variety of equipment financing and leasing options as well as 100% financing. Using this company, you’ll also enjoy minimal paperwork and great customer service. 

Be cautious when choosing alternative lending

Alternative lending is very different from conventional financing. While it offers a unique set of benefits for businesses that use it correctly, it can also be fraught with potential problems. When seeking funding for your small business, note any red flags and always be sure to use a reputable provider.

Dock Treece contributed to this article. Source interviews were conducted for a previous version of this article.