What is a Non-Bank Business Loan?
What is a “non-bank loan”?
It is an evolution from a traditional business cash advance. As the business cash advance industry continues to mature I anticipate additional funding companies will step in and fill gaps in the marketplace. Initially, business owners who could not get a traditional bank loan for any of a dozen reasons had only business cash advance as an alternative. Even with great credit and a willingness to sign a personal guarantee, these owners were stuck with higher priced capital and shorter repayment periods.
Over the last year, a couple innovative financial companies have developed programs that begin to fill this niche. The first program I call a “non-bank business loan”. This is an actual loan (unlike a business cash advance) and has a personal guarantee. However, it is preferred over a cash advance because it is much less costly and does not require any change to your merchant processing company as some business cash advance companies do.
These programs do not require a change of credit card processor, they simply divide the repayment amount by 250 (business days in a calendar year) and take that amount as a fixed daily payment. Some owners prefer a consistent daily payment which has an even impact on cash flow rather than the variable repayment that cash advance offers. However, some prefer repayment that slow when revenue slows and increases during strong cash flow periods. The choice is yours.
As the economy has worsened over the past year, these companies continue to provide financing to business owners who qualify, though some have reduced the amount of financing they are willing to offer. While this funding is very welcomed, the amount of financing is often a source of frustration.
What is a “private” non-bank loan?
It is virtually the same as above but these programs are financed by private investment funds and typically offer the same pricing but larger funding amounts. They will typically require more documentation (2 years tax returns) than other funding alternatives, but offer an excellent combination of pricing and lending amount. Many of these funds will lend up to 6% for your total annual sales (averaged over your last 2 years). So, if you have averaged $1.5 million over the last two years, you should expect financing up to $90,000 if you qualify.
I expect more of these small, intelligent funds to enter the marketplace over the coming years.