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Alternative vs Traditional Lending: The Important Differences

Alternative vs Traditional Lending: The Important Differences | Fintech Finance

In the past, small business owners had only one option when it came to applying for a business loan – their local bank. Today, however, there are hundreds of online alternative lenders that facilitate fast loans for small business owners and sometimes the terms can actually be more agreeable. That being said, there are always going to be advantages to the “old fashioned way.”

With that in mind, we’ll be taking you through the advantages and disadvantages of working with an alternative lender or a traditional bank.

Traditional banks

Generally speaking, a traditional lender will either be a bank or a credit union and were once the only viable source of loans and/or credit. Because they were the only game in town for so long, this has allowed them to be a little pickier with who they choose to lend to, which means if you’re a  business with a proven track record, you might be better off going the traditional route.

Traditional banks can not only offer lower APRs but generally have a more extensive range of financial services and products to choose from. Their long histories also mean that they have a wealth of experience to draw from. This means that anyone with an exceptional credit score or any business with a few years under its belt should at least consider it as an option.

However, traditional banks also have much higher application standards and lower approval rates. They also can’t move as fast as their nimble challenger alternatives, so you generally won’t get your money as fast.

Alternative lenders

For younger businesses (or younger people, in general) taking the alternative route and approaching a fintech for a loan is typically going to be the better option. Not only are the application requirements far more forgiving but you’ll also get your money much faster. The only real drawbacks are the higher APR and the fact that they are less proven entities than their traditional counterparts.

Why are alternative lenders more expensive than banks? There is a multitude of reasons really. For one thing, they are leveraging the best of the best as far as the latest technology is concerned and that doesn’t come cheap. We’re talking artificial intelligence and cloud-based software, as well as the latest in automation. Then there’s the extra customer support investments and the sheer speed of their offering to take into account as well as all that cloud storage space.

As the old saying goes – “you get what you pay for” and by choosing an alternative lender you are essentially future-proofing your loan. It might have been a bit of a gamble to go with one of these young bucks but today some of these fintechs are just as respected as the banks they will soon be taking over. Mark our words! Alternative lending has gone mainstream and we’re all better for it.

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