Traditional banks make money through interest on loans. Customers who take out a loan pay interest on the amount that they take out, thus paying the banks for the money that they borrowed and providing a profit for the banks. Traditional banks get money to lend directly from other customers' savings and checking accounts as well as from the federal government. Because of this, banks are under strict guidelines and scrutiny from the government. Traditional banks are required go through a number of processes and paperwork in order to loan money. This can take quite a bit of a time, which is a major drawback to traditional bank loans.
Alternative lenders also make their profit on interest. They sometimes charge up to fifty percent interest on their loans. They can do that because alternative lenders get their money to loan mainly from investors. These investors provide money to alternative lenders with the hopes of getting a big profit in return. Because alternative lenders get their money from alternate sources, they don't have to jump through the same hoops that traditional banks do. Paperwork is faster and customers are able to get their loans more quickly. Because of this quick turnaround, alternative lending is a rapidly growing market. Alternative lenders picked up a lot of traction in 2008 with the downturn of the market and have been gaining popularity ever since because their ability to provide loans to customers with less than perfect credit scores.
How do customers qualify for traditional bank loans or alternative loans? If customers were able to take out loans without any restrictions, a lender could never really insure that they would get their money back. To protect against this, lenders require several things like credit, collateral, etc. from their customers-but credit is the most important.
Credit is the record of a customer's (businesses and individuals alike) timeliness of paying back other smaller loans, like credit cards or car loans. The better the credit a customer has, the more likely they are to get a loan from a bank. Good credit is usually acquired when a customer has two or more medium-sized loans that they regularly make on time payments to the creditor.
Credit matters a lot to traditional banks. Because of the intensity of the requirements placed on traditional banks by the government, banks require a high credit score. Credit also matters to alternative lenders, but much less so. Alternative lenders generally have low credit score requirements. They can provide quick loans to customers without looking deeply into their credit because they are not regulated by the federal government.
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