The lending landscape is constantly shifting, and one of the biggest recent shifts has been in the form of start-up entrants offering business loans.
These companies are changing the traditional lending model, making the process quicker and easier for small businesses to gain access to the capital they need.
In contrast to traditional banks, these start-ups are utilizing technology to streamline the process and create more forgiving alternatives for borrowers.
The Traditional Lending Process vs. Newcomer Start-Ups
In the past, it was like jumping through a lot of hoops to get a business loan.
You had to visit a bank, fill out tons of forms, and wait weeks, or even months, to find out if you were accepted.
Old-style banks were highly discriminatory regarding to whom they loaned money, and small firms, especially newer ones or ones with weaker credit, found it difficult to obtain loans.
But the new start-ups by new entrants have reversed this entire model. Here’s where the difference lies:
- Speed: While traditional banks may take weeks to process loan applications, start-ups can approve loans in a matter of days, or even hours.
- Technology: Many start-ups use advanced technology, including artificial intelligence (AI) and machine learning, to assess a business’s creditworthiness.
- Lower Barriers to Entry: Newcomer start-ups tend to be more flexible when it comes to lending criteria.
How Start-Ups Make It Easier for Small Businesses
The flexibility and convenience that start-ups bring to the table are huge advantages for small businesses.
Here’s a breakdown of how they are making it easier for business owners to get the funds they need:
Online Application Process
Start-ups generally have an online website through which business owners can apply for a loan without leaving their own office or home.
This eliminates the necessity to either schedule an appointment or visit a bank, both of which save time and effort.
With just a couple of clicks of the mouse, firms can apply, upload supporting documents, and get approved in a few days.
Alternative Lending Options
Start-ups can be hesitant to use typical credit scores while sanctioning loans.
They might use other information like the cash flow, revenue pattern of the enterprise, and even its social media following.
This offers opportunities to businesses who would otherwise have struggled to raise finance through more traditional channels.
Flexibility with Loan Terms
Many new start-ups offer more lenient terms on their loans than traditional banks.
For instance, they might permit companies to repay loans in advance without fines or rework repayment timelines depending on fluctuating seasonal cash flow.
This adaptability can rescue small businesses from the stress of stringent loan terms.
The Risks Involved with Start-Up Business Loans
While newcomer start-ups offer many benefits, there are also some risks involved.
Higher Interest Rates
A drawback is that start-up loans tend to have interest rates that are higher than those available in more traditional banks.
This is because start-ups have to take more risk by lending to firms that would otherwise not qualify for a standard loan.
Consequently, the interest rate could be higher to compensate for the increased risk.
Shorter Repayment Periods
Start-up lenders may offer faster loan approval, but may also require faster repayment.
There are short-term loans, which can be too much for those businesses that have slower cash flow or fluctuating sales.
Be sure to read the fine print and confirm that you are able to cheaply service the repayment schedule.
Limited Customer Support
Another potential risk is the lack of customer support. Start-ups, especially smaller ones, may not have the same level of customer service as larger banks.
This could make it harder to resolve issues or get guidance on loan repayment.
Key Tips for Getting a Loan from New Start-Ups
If you’re considering applying for a loan from a newcomer start-up, here are some tips to help you navigate the process:
- Know Your Financials: Start-ups will likely want to see your business’s financial records, so make sure they are organized and up-to-date. This includes your cash flow, balance sheet, and any other relevant financial documents.
- Compare Lenders: While some start-ups may offer better terms than others, it’s essential to shop around. Compare interest rates, repayment terms, and any fees that may be associated with the loan.
- Read the Fine Print: Make sure you understand the loan’s terms and conditions before signing anything. Pay close attention to fees, interest rates, and any early repayment penalties.
- Build a Relationship: Even though these start-ups are tech-focused, building a relationship with them can still be beneficial. Good communication and transparency can help ensure you’re approved for future loans if needed.
Conclusion
Newcomer start-ups are making it easier for small businesses to access the funding they need.
They’ve developed faster, more responsive lending processes that archaic banks can’t deliver.
But, just like in every financial investment, it’s not without the understanding of risks, which include increased rates of interest and shorter repayment period.
Start-ups have definitely transformed lending, and for many small businesses, it’s a welcome change.
