Your relationships with your business banking clients are the driving force behind your impact and goals. Of course, you always hope your clients can qualify for the high-quality financing products you offer, but what can you do when they fall outside your credit box?
As your business clients are inundated with more loan options from more lenders than ever before, you’ve got to stay competitive, and alternative lending can set you apart from the crowd.
In this guide, you’ll explore the ins-and-outs of alternative financing for business bankers, including types of loans and what to look for in an alternative lending partner.
What is alternative lending?
Alternative lending includes everything from SBA loan programs, to flexible options from non-traditional lenders, and everything in between. It’s a world that offers tons of possibilities through responsible lenders, and cautionary tales from too-good-to-be-true offerings. With a set of trustworthy options to rely on, you can deepen your client relationships and reach your goals.
Wouldn’t it be great to help more of your clients find responsible financing options to keep their businesses (and deposits) growing?
How alternative financing can grow your client base
As a business banker, you understand how important the right funding is to grow a successful business. You also know firsthand how difficult it can be for some businesses to meet traditional lending requirements.
When you have to say “no” to a business because they don’t qualify, you still want to leave the conversation on good terms. If you deny their application and move on, will they come back to you for future requests? What impact will that have on your client relationship?
Instead, you can connect them to a reputable alternative funding source so they can continue to meet their goals. If they apply with your alternative lending recommendation and qualify for the loan they need, they’re more likely to return to you when they can qualify for conventional funding.
Don’t lose out on a potential client because of lending requirements, help a business get on the right path while building your future client base. Loyalty and goodwill go a long way for strong, long-lasting client relationships!
Who are the responsible alternative lenders?
Making a referral is a big decision! You want to avoid the dreaded double decline and know that your client’s experience with this referral partner will ultimately reflect on you as well. You want to help in any way you can while building the potential for future business opportunities; and you want to maintain your reputation as a reliable and honest business banker.
To increase your client’s chance of success and reduce the risk of referring someone to a dishonest lender, you need to understand the alternative lending landscape. Here are the key players:
Community Development Financial Institutions (CDFI)
CDFIs are private financial organizations dedicated to responsible, affordable lending for low- and moderate-income communities and people without access to financing.
To become certified, organizations must meet strict qualification standards to ensure their service aligns with the mission of a CDFI. One notable requirement for CDFIs is that they must provide development services along with financing products. Business owners who receive funding through a CDFI have access to resources, mentorship, and education to improve their finances.
You can feel comfortable sending your clients to CDFIs because of the education and training they’ll receive to keep improving their businesses. There’s also a better chance that they’ll return to your bank when they’re able to qualify for conventional lending.
Certified Development Company (CDC)
The Certified Development Company program is run by the U.S. Small Business Administration (SBA) to administer its 504 loan program. The program finances owner-occupied commercial real estate projects and fixed assets while allowing the business owner to keep more money in their venture with just a 10% equity injection.
According to the SBA website, a Certified Development Company (CDC) is a nonprofit corporation that promotes economic development within its community through SBA 504 loans. CDCs are certified and regulated by the SBA, and work with the SBA and participating lenders (typically banks) to provide financing to small businesses, which in turn, accomplishes the goal of community economic development.
CDCs partner with traditional banks to expand their pool of potential small business loan customers without taking on the added risk, as SBA 504 loans are backed by the United States government.
Online Lenders
As financial technology continues to improve and integrate into more institutions’ workflows, online lenders are also increasing in numbers and offering more options to your clients. If you’re working with a business owner who isn’t able to qualify for traditional funding, you can point them to a reputable online lender.
Just like any other referral, it’s important to diligently vet an online lender before recommending them to a client, as many offer unaffordable rates for short-term loans. The online lender should be reputable, offer affordable rates and terms, and have processes in place to help improve your client’s financial outlook.
To increase the likelihood that your client will return to you when they can qualify for a traditional loan, make sure the online lender is not a bank replacement, but an alternative funding resource that can be used temporarily.
What are the benefits of offering alternative lending options?
There are many benefits for both you and your clients in offering alternative financing options. Here’s how your bank can benefit from referring clients to alternative lenders:
- Help close deals you can’t make
- Remain competitive
- Retain customer loyalty
- Keep the deposit relationship
- Build future business
The truth is, most business owners don’t know where to turn next if it’s a “no” from their bank. They look to you as a trusted ally. You can help them navigate the complex alternative lending landscape during this vulnerable time so they don’t have to figure it out on their own. This will establish a strong relationship between you and the client, build rapport, and lead to future revenue for your bank.
Alternative financing products
Now that you’re familiar with who the players are and the benefits of referring clients to alternative lenders, let’s explore a few loan programs offered through the SBA that can help your clients get the funding and support they need:
SBA 7(a) loan program
The SBA introduced the 7(a) loan program to provide financial assistance to small businesses. SBA 7(a) loans are offered up to $5 million with reasonable interest rates that are negotiated between the lenders and borrowers. These loans are great options for businesses that are less risky from a lender’s perspective.
Within the SBA 7(a) loan program is the SBA Community Advantage loan program, which offers up to $250,000 with a max interest rate of Prime +6%. Due to their capped loan size and higher interest rates, an SBA Community Advantage loan is a great option for startups and businesses that carry inherent risk.
CDCs, microloan program intermediaries, Intermediary Lending Pilot (ILP) program intermediaries, and non-federally regulated CDFIs can all be SBA 7(a) and Community Advantage lenders.
SBA 504 loan program
The SBA 504 loan program provides economic development opportunities to businesses so that they can grow and create jobs for others in their communities. The program has provided more than $50 billion in below-market rate funding and helped create more than two million jobs in the United States.
Through the SBA 504 loan program, businesses can receive long-term, fixed-rate financing with low down payments from SBA’s community of CDC partners.
How SBA 504 deals are structured
SBA 504 loans have a unique financing structure, which can be broken down into three components: the lender’s portion (50%), the SBA’s loan backing (40%) and the borrowers’ down payment of just 10%. SBA 504 loans are ideal for borrowers who are financing bigger purchases like large machinery or owner-occupied commercial real estate. With just a 10% down payment, the business owner keeps more money in their business to continue growing and reaching their goals.
How SBA 504 funds can be used
SBA 504 loans can be used to purchase new land and improvements, constructing or renovating an existing facility, purchasing large machinery, and refinance debt from business expansion. Since these loans are often backed by collateral, they’re less risky than other unsecured loans like working capital packages.
It’s important to note that SBA 504 loans can’t be used for working capital, purchasing inventory, consolidating debt or refinancing debt that isn’t connected to business expansion.
How to identify SBA 504 loan opportunities
To be eligible for an SBA 504 loan, your client must meet the following criteria:
- Business must be for-profit
- A tangible net worth less than $15 million
- Average net income of $5 million or less (after federal income taxes)
What to look for in an alternative lending partner
Partnering with the right alternative lender can mean the difference between building up trust and rapport and losing it.
Ideally, you’ll want to build up a solid list of reputable lenders that you feel confident in. That way, when a business owner comes in for bank financing, you’ll have already vetted potential alternative lenders who can help support your client’s goals if they aren’t able to qualify with your bank.
1. Transparency and honesty
This one may seem obvious, but it’s the number one quality to look for in any financial partner. Visit their website, subscribe to their newsletter, and read their blog. Here are some questions to ask yourself as you peruse their website:
- Are they committed to providing value outside of basic advertising?
- Do they list their rates, fees, and process in plain, clear language on their website?
- Do they seem like they have something to hide?
- Do they treat their clients fairly?
- Do they honor the relationship as a partner?
2. Product mix
Next, it’s important to look at whether they offer a product mix that can best serve a business owner’s needs. At the same time, you’ll want to be careful not to refer a potential client to an institution that can replace your future banking relationship. A healthy, varied product mix demonstrates their commitment to client success, but a full suite of business banking products can potentially replace the need for a traditional bank in the future.
3. Expertise and track record
When choosing an alternative lending partner, it’s important to choose one with extensive expertise and a great track record. This benefits your clients you’re referring over, and also helps you handle important tasks like managing CRA credits.
Ask your trusted colleagues for references of alternative lending partners. Ask questions about what their experience has been like, whether they see referrals eventually come back “home” when they’re able to qualify for traditional financing, and if they’re easy and pleasing to work with.
Start exploring how alternative financing works with your bank
By providing alternative loan products, incorporating SBA programs into your business and making connections with solid alternative lending partners, you can rise above the competition, secure future business banking clients, and reinforce your reputation in the banking industry.
Ready to find an alternative lending partner to grow your client base? Explore reputable, reliable, and experienced alternative lending partners through Pursuit today.
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