Traditional Lending and Alternative lending: What are the differences and what is better?

Traditional lending is the most common kind of lending, these are loans financed by traditional banks and lenders. This type of financing is usually used for mature companies. Traditional financing is known to offer the lowest rates and offer great terms. It has been the benchmark and standard to compare for alternative available options.

The growth of alternative lending in recent years is following the financial crisis, especially for small businesses. Alternative lenders started to emerge in 2014 and rapidly became a significant force in the global financial industry. The increase in loans from alternative lenders has surpassed traditional bank loans because of its dependability and accessibility.

Today, bank and credit unions are not the only reliable financing options available. The Increase of alternative lenders is easily obtainable as well. What makes the two different and what will be the option as a borrower?

Traditional lenders: Recommended for active businesses that value lower interest rates

Pros Cons

Lower Interest rates Higher requirements for application Dependable, long history in finance Lengthy process

Offers other services Low approval rates

Traditional lenders are the banks and credit unions that have been operating for almost forever. It was the pioneer for introducing the idea of loans, it was the only sources available for the longest time. Banks are more trusted and have more access to large capital, so banks tend to offer the lowest interest rates. Banks has a low annual percentage ranging from 3% to 8%. An additional benefit is that banks can provide extra services like personal accounts, merchant services and credit/debit cards. Some banks provide bundles as well, giving businesses discounts.

The disadvantages of traditional lending is that banks had the privilege to be more exclusive and pickier in choosing organizations they lend to. Traditional bank loans require a high application profile to qualify with upfront costs without guaranteeing a loan. This can also be a lengthy process; it takes various numbers of steps in order to receive funds and could take 1-3 months. Banks have low approval rates and if a business will not get approved, this will both waste the time and money used for the application.

Alternative lenders: Recommended for new businesses that require convenience

Pros Cons

Lower requirements for application Higher interest rates

Fast funding process Unproven records

Higher approval rates

Alternative lenders are more of a new way of lending, it’s new in the business finance sector. It only has been around finance for a decade or less. As the word “alternative” suggests, alternative lending offers an option for businesses that can’t qualify for traditional bank loans. Alternative financing, in general, has a more lenient application requirement. It also has faster funding time that can be processed in a matter of 1-2 days and fund you in one week.

Alternative lenders gather funds from mostly on their own pockets and one of its drawbacks is its relatively higher interest rates that can go up to 10-15% depending on what company you apply for. Alternative lenders don’t have a lengthy history, it’s quite new in the business of finance. Alternative lending is not the right option for people that are quite traditional and has a preference for companies that have been in the finance world for a longer period.

Choosing the best lending option

There’s no right answer in choosing the best option to choose, it will depend on the situation of the business up for a loan.

If you can qualify on bank’s requirements, you don’t need money immediately and you don’t mind waiting to be able to claim your funding, a traditional bank loan will be a better option. Traditional banks offer lower interest rates, higher limit in borrowing and other more services. However, if you are in a hurry for funding, prefer a simple, convenient, fast application process and you don’t qualify for the bank’s requirements, alternative lending would be the perfect option as it offers a quick solution.