Small Business - 03.17.2016

How To Select A Lending Product - Part 3

A three part series on why cash is king for Small Businesses

As we’ve said before, the rule is that the harder it is to get a loan, the better the terms are going to be. The same thing is true of lenders: the more deliberate they are about underwriting, the more favorable terms you will get.

There are four basic types of lenders:

  • Banks/SBA/Savings & Loans: Banks are banks: think suit and tie, ATM, branch offices, depositor money.
  • AlgoShops”: These are high-tech non-bank lenders that leverage mathematical algorithms to make loans quickly, with little or no due diligence.
  • Alternative Lenders + Underwriters: These are non-bank lenders that use a combination of risk-based pricing models and expert underwriting to make loans.
  • Sharks: These are high- or low-tech non-bank lenders that leverage super high interest rates to make loans quickly, with little or no due diligence.

Banks

Banks offer the lowest rates bar none. They have the lowest-cost lending capital (deposits), usually mixed with a government-backed SBA guaranty. They are also very discerning underwriters. They’ll take the time to dig into your business to make sure you can repay them (or you have enough collateral if you don’t), which drives the rate even lower.

If you can get money from your bank, you should.

That being said, if your credit score is lower than 680, you’re less than 3 years in business, and you have less than $1-$2 million in annual revenues, you probably shouldn’t waste your banker’s time. Banks want to help, but they have conservative risk policies. They are lending with depositors’ money, after all. In most cases, it does not make sense for them financially to make small loans to young businesses. Too much risk, not enough reward.

(The big exception to this rule is commercial real estate. The value of the collateral de-risks the loan, giving them more flexibility to do a deal).

AlgoShops

AlgoShops are just risk-based pricing models with cash. They’re all over the Internet. They check your credit, gather a few (self-reported) data points on things like income, debt, and revenue, and spit out an interest rate and loan amount, usually in the high teens to low 30s.

But their algorithm can’t look beyond the top-line numbers to tell the difference between a strong business and weak business. Plus they have a hard time catching certain types of fraud. That means if your business falls in the strong category, you’re paying more than you need to.

Alternative Lenders + Underwriting

Think of these as alternative lenders with a human touch. They have humans review your financials for accuracy and fraud prevention. As a result, they are better able to price your risk, meaning if you’re a strong business, you’ll get a lower rate.

Sharks

Sharks are high-speed lenders focusing on borrowers who can’t or don’t have time to get loans elsewhere. They often don’t bother with risk-based pricing or underwriting. The business model is simple: move money as quickly as possible at the highest rates possible (4111% APR is the highest we’ve seen, but 100% is not unusual). Then, when borrowers run into trouble, refinance them with a second loan. And a third. And so forth.

Once the borrower is caught in that cycle, we have found that the best strategy is to try to refinance with a non-shark over a longer term. Sharks charge prepayment penalties, so the borrower ends up paying more in absolute dollars, but it’s over a longer period of time and therefore typically at a much lower APR.

Still, the best way to get out of the trap is to plan to spot it for what it is before you fall in. Here are three questions you can use to spot a shark:

  • What is your average interest rate? If they won’t tell you this, it’s probably because they charge exorbitant rates.
  • Will you tell me my APR at the time of my loan? If they won’t tell you this, it’s probably because they charge exorbitant origination fees.
  • Which businesses are not a good fit for your product? If they won’t tell you this, it’s because they don’t care about your business, only moving money.

If you can’t get straight answers to those three questions, you’re probably dealing with a shark.

Able Lending

So where does Able fit? We are an alternative lender with expert underwriting.

But we’re more than that. We leverage two risk-mitigation strategies to offer you the best price.

First, our underwriters are all CPAs trained as auditors by Big 4 firms. As a result, we pride ourselves on understanding the ins-and-outs of each business we review to make discerning pricing decisions. That means if you’re a top-quality borrower with sound business fundamentals, we’ll help you get a lower rate.

Second, our risk-based pricing model allows you to bring Backers to the table. Backers help reduce the risk of your loan. Less risky loans mean lower interest rates, and that translates into cash. For instance, assuming you had a credit score of 680, bringing in 25% backers could save you as much 4 full points on interest. On a 36-month $200,000 loan, that would translate into $12,130.85 in savings.

The combined effect makes for our value proposition: apples-to-apples, we are the lowest cost non-bank lender in the country. And we intend to stay that way

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