Over the past year there has been an important shift in the alternative lending landscape for small business owners and entrepreneurs. A new group of non-bank lenders have entered the market and are willing to lend to business at amortizations that spread three to five years at interest rates that are typically in the mid to high teens. Some of the primary players in this category include Lending Club, Dealstruck, Fundation and Funding Circle.
These new players create a big and important shift from the short-term cash advance or on-line daily ACH lenders who typically lend money at six-month amortizations with APR's that can range from 30--200 percent. Some of the big players in this market include OnDeck and CanCapital, amongst others.
In my opinion, any entrepreneur who is looking for an alternative loan should consider one of these new players first, before considering a cash advance. While their credit standards are tougher, if you are lucky enough to get one of these loans, your rates will be a fraction of the price of the cash advance lenders, you will have reasonable monthly payments vs. daily debits from your checking account, and you will have no or minimal pre-payment penalties.
That being said, many entrepreneurs still don't know about the new players--and a big reason for this is there is not a name for their category of lending.
"Alternative Lenders" is a broad term that often refers to many of the big names in the space and encompasses a lot of types of loans, including cash advance merchants. These new lenders are not short-term cash advance lenders, so it would be unfair to pigeonhole them into this grouping.
I would like to suggest that we call the new group of lenders "investment lenders". The reasoning behind the nomenclature is that these types of loans give businesses enough time to take a loan to make an investment in their company, let the loan improve their business, and pay it back over a reasonable time of period. This is in sharp contrast to the cash advance lenders whose short loans often force the borrowers into multiple renewals and increased rates.
If we can all agree on a term, it will be a good thing for the lending industry and entrepreneurs. I think the term "investment lenders" provides an important contrast and distinction between the two products and I plan to use it in my talking and writing about the industry going forward.