What to Look for When Looking for Alternative Loans
At times, it has been observed that the traditional credit market become a little too strict when it comes to getting loans. As a result, borrowers, both individuals and companies, try to look for a way other than the traditional credit market in order to finance themselves. This is why they seek alternate options for loans.
There are a lot of alternative loans present in the market, but not all of them have been around for a long time. Most of the loans came about during the financial crisis of 2007-2008 as the cost and risk of borrowing was soaring and people were desperately looking for ways to finance their businesses
Following are some nontraditional financing tools through which a business can fund its operations.
Factoring or Account Receivable Financing
As the name suggests, the businesses would sell their receivables to financial institutions which would provide some percentage of the receivable as a loan. This percentage is usually somewhere between 75-80% of the face value of receivables, but it’s not a strict rule. The rest of the portion is kept as reserve.
Venture Capital Backed Company Loan
The loan is available to a very small number of companies that qualify for it. Companies that have the backing of venture capital companies with an established relationship with loan-providing banks greatly benefit from it. This is due to the fact that not a lot effort is required in terms of due diligence as the bank would rely on the information provided by venture capital companies. Hence, companies can get access to lenders that were not available to them previously.
Hedge Fund Lenders
These are now referred to as the new corporate ATMs as they are known to invest in highly risky businesses. How much loan would be given would depend on the pitch the business makes, but they provide a lot more flexibility than any traditional lender might provide.
Convertible Debt Instruments
These are like normal bonds, but the owner of the debt has to reserve some equity due to the fact that they have the power to convert their bonds into stock, thus successfully holding the equity position in a company.
As the name suggests, these are the lenders who are your family, your friends or someone who knows you and is interested in your business. Both formal and informal lending comes under this.
Credit Card Lenders
This loan is taken by people who are starting up a business or are in its initial stages. If the credit history is good, the loan would be received quickly and easily.
Alternative Loans for Education
When it comes to higher education, most people are in need of a loan. However, this does not mean that everybody gets it easily. Alternatives loans are a kind of private loan that is usually offered by financial institutions to students so that they can fund their studies. These are in addition to what the student already owns.
What to Look for When Looking for Alternative Loans
There are a lot of financial institutions that would offer loans and do not come under the umbrella of a traditional loan provider. However, this does not mean that all loans are equally profitable in terms of how much you have to invest. This is the reason why you need to look into each and every factor so that you can evaluate if taking an alternative loan would be as good as you initially thought. Following are some of the factors that you should look into before getting an alternative loan to ensure that you do not end up making a wrong decision.
APR or Annual Percentage Rate
APR means how much you have to pay each year in order to keep the loan. This includes costs like interest cost, charges, and other fees. The APR depends on factors such as how long is the maturity date, what are the terms of the loan, how much is the loan amount and what is the economic condition at that time.
In order to compare APRs, you should make sure that the amount of loan provided by both financial institutions is the same so that the comparison is more genuine. Nevertheless, taking APR as the only indicator to identify a good loan from a bad loan wouldn’t be the best of idea as a lot of other factors also affect the alternative.
One of the things that would constantly change the APR would be the interest cost that fluctuates a lot in the lifetime of the loan.
It is very important to know who is the one that would aid you in servicing your loan. The reputation of the financial institution also matters. You should find out if the loans are traded on the secondary market or if the deal is with a third-party servicer. If the lender is providing their own services, you would be with them until the loan expires.
Preapproval and Approval
Preapproval means that you would be notified based on the credit score you have if you would be eligible for the loan and would qualify for it. This is done before the application has been completed. There are times, however, when the lender might provide a loan to their customer even before the preapproval. Credit decision can also be made over the phone or the internet to approve loans instantaneously.
Repayment Period and Repayment Incentives
When it comes to the repayment period, the more cautious you are, the better. You need to see how long your actual repayment period is. You should also calculate the monthly payments you would have to make before you decide if borrowing is wise. You need to see if, by paying more, you would be able to get a higher saving over the life of your loan or if it would not be as profitable. You need to also verify if the financial institution has some kind of penalty over pre-payment.
There are lenders that like to reward the borrower by providing certain incentives like lowering the interest rate after a certain portion of the loan has been paid back. However, not all incentives translate to profitable loans. You need to see whether by taking some other loan, you can get more convenience due to the incentive it provides. There are also lenders that don’t provide any sort of incentive due to the fact that their cost of borrowing is already as low as can be offered, whereas the one who is providing incentives is giving out loans at a higher overall cost.
Cosigner Requirement and Release
While some lenders might not ask you this, a lot of them ask for a cosigner who is creditworthy. This is because if a cosigner is provided, the risk of default becomes relatively low and the lender might provide better terms and more flexibility for the borrower.
Although a cosigner is an important tool to make sure that the borrower doesn’t default, in order to show faith in the borrower, sometimes the lender would release the cosigner after the borrower has paid a certain part of their debt on time. You would have to verify this with the lender you are thinking of borrowing a loan from because every borrower might have different terms for the release of the cosigner.
You need to ask some questions to get everything in the clear like would you have to request for a cosigner release? Would they be reviewing your credit? Will they change the terms of the loan after the release of the cosigner? All these questions are important as they would distinguish one loan from another.
Repayment terms are different for different lenders. Some might ask you to start repaying immediately, while others would offer to start the repayment period after a certain time period has passed. This means that the loan you would be taking would depend on the fact that you are capable of paying the loan back immediately. If not, then you should go for a loan whose repayment doesn’t start until after a certain time period.
Lenders often charge borrowers a fee in lieu of the alternative loan being borrowed. You need to know exactly how much the fee is and what the terms are. The fee might be charged at the time of disbursement. This would mean that when you would receive your loan, the fee would already be deducted from it. Lenders also have interest in this fee. Look for a lender who either has a very low loan fee or would charge it at the time of disbursement. Some borrowers get happy at the idea of not being charged a loan fee. However, the lender offsets it by charging a relatively higher interest on the loan.