If your bank turns you down for a small business loan, you’re out of luck, right?
Not necessarily. In fact, nontraditional lenders or, as the Small Business Administration describes them, nondepository lenders, may have money for you when the banks don’t, and might offer longer repayment terms and interest rates that are quite competitive.
Nondepository lender doesn’t mean fly-by-night. Some of the largest makers of SBA-backed loans are nontraditional lenders such as The Money Store, one of the biggest in the United States.
The need for financing that falls outside what banks normally offer to small businesses has fueled the demand for other lenders’ services. The trend, although not new to the industry, is just beginning to take hold in western Pennsylvania.
“This area’s just recognizing what’s been a trend in the rest of the country for a long time,” says Marilyn Landis, business development officer for Heller Financial, a major nontraditional lender with a new office in Pittsburgh.
The growth of nondepository lenders is driven by several factors. Banks, seeing that nontraditional lending can be profitable, are doing an end-run around banking regulations by acquiring or establishing their own nontraditional lending ventures. National Bank of New England and Bank of America, for instance, have divisions with offices in Pittsburgh that offer nontraditional lending services.
Nontraditional lenders have some cost advantages. They can do business in a region simply by establishing a development office, bypassing the need for the “bricks and mortar” required to launch a bank branch. Development officers such as Landis are compensated on a commission basis, so they are generally experienced in their lending area, work hard to establish a network of contacts who will feed prospects to them and know how to quickly qualify an applicant for a loan, thereby culling the best prospects from their contacts and concentrating efforts on them.
A tendency for local bankers to be conservative in their lending practices means a large number of good deals fall through the cracks. A bank may see the value to a business in a loan to purchase a new building, for instance, but its lending criteria prevent it from financing the deal. The bank may then refer that customer to a nontraditional lender who, let’s say, specializes in financing property.
“We’ve seen the two work together in Western Pennsylvania, anyway,” says David Miller, assistant director for economic development in the U.S. Small Business Administration’s Pittsburgh district office. He adds that nondepository lenders “significantly complement the banks by being able to do more highly leveraged lending.” Nondeposit lenders usually specialize in one or a few financing areas, such as real estate, manufacturing or retailing, so they can often see opportunities which a conventional lender might miss.
At the large banks, small business banking usually starts at the branch level. There, a bank employee takes an application, then forwards it to a central decision-making office, where it is checked against several objective criteria. If it fails on any point, it likely will be rejected. Nontraditional lenders, on the other hand, take into account factors other than the hard numbers.
A business may need to finance equipment, for instance, that will significantly increase its cash flow, but a bank may reject the application because the business owner needs to borrow all or nearly all the money to purchase it and needs to finance it over a longer term than the bank will extend. A nondepository lender, however, may look at the cash flow projections and deem the loan a good risk, despite the fact it is lending the full purchase price.
Landis advises businesses looking to alternative lenders to prepare carefully. A potential borrower, she says, should be able to describe how the money will be used in very specific terms, such as for an equipment purchase or a real estate transaction, and how much will be needed. Good historic numbers for the business and a realistic notion of how long it will take to repay the loan are also necessary.
Miller says borrowers should be aware that nondepository lenders don’t normally offer lines of credit, and that most of the services available through a bank, often as part of the financing package, aren’t available with nondepository lenders’ loans.
And nontraditional lenders aren’t any more likely to finance a start-up than a bank would be. “Alternative lending is not a panacea for start-ups,” says Landis. “Start-ups are still tough.”
Landis suggests would-be entrepreneurs look for a business to purchase if they lack the resources to launch their own venture. Nontraditional lenders, she says, are often willing to offer highly leveraged financing to purchase an existing venture, especially when the borrower is experienced in the business.
