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Alternative Lending Options: Finding the Top Non-Bank Business Loans

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As of 2018, there was a $5 trillion gap between the funding needs of small and medium business and the traditional, institution-based financing available to them, according to the SME Finance Forum, which works towards expanding financial access for these businesses. This funding misalignment has helped alternative lending become a major new option.

The rise of alternative lending has been a boon for small business owners and other potential borrowers who are not necessarily a good fit for traditional lending and financing. That’s because alternative lending — financing from a non-traditional source — generally has less stringent requirements for borrowers, and it’s available for a wide variety of purposes.

What is alternative lending?

Alternative lending refers to any kind of financing from an external source that is neither a bank nor a stock or bond market. Most often, alternative lenders operate through online platforms, and they can offer a range of products, from term loans to merchant cash advances.

In general, alternative business lending has less stringent requirements than traditional institutions. A bank will generally require good personal and business credit, as well as a certain amount of time in business to extend a small business loan. In contrast, an alternative lender will likely have lower minimum credit score requirements and less strict requirements for time in business.

With fewer qualification requirements come higher approval rates. According to the Biz2Credit Small Business Lending Index, big banks (meaning banking institutions with more than $10 billion in assets) had a small business loan approval percentage of just 28.3% as of February 2020. Alternative lenders, on the other hand, approved 55.9% of small business loans in that same time.

In addition, the average closing period for traditional small business loans is 45 to 60 days. That’s the amount of time you will have to wait between turning in all parts of your initial application and when your funds are released to you. Traditional small business loans typically go through a multi-phase process before releasing the money, which is why they can take as long as 60 days to close. Loans from the Small Business Administration (SBA) can take even longer.

Many alternative lenders, on the other hand, can approve small business loans within one to three business days, or even sooner.

Types of alternative lending

Since small businesses have a variety of financing needs, it’s natural that alternative lending options include a number of different products to meet those needs. You can find the following types of loans through alternative lenders.

Term loans

A term loan is a lump sum that is borrowed all at once, and paid back over a specified term at a fixed interest rate. It’s what most people commonly think of when they refer to a business loan. The repayment term can last anywhere from just a few months to as long as 10 years, and sometimes even longer. The amount available to borrow depends greatly on the borrower’s creditworthiness and business profitability, as well as length of time in business.

Many small businesses seeking term loans will go through a traditional lender, since banks are generally able to offer longer terms and better rates than alternative lenders. However, alternative lenders do provide term loans that may be easier to qualify for.

Business line of credit

Unlike a term loan, which extends the full amount of the loan all at once, a business line of credit allows a small business owner to withdraw money up to an agreed-upon amount within the revolving credit line. Once the borrowed amount is paid back, the full amount is again available to borrow, similar to how a business credit card works.

This kind of product offers business owners a ready source of immediate funds. This can allow a business owner to hire as needed, purchase necessary supplies or even expand the company when an opportunity arises.

Equipment financing

Necessary equipment for running a business can be financially out of reach if you have to rely on making purchases in cash — that’s where equipment financing comes in. This kind of loan will help you purchase the equipment, even if you have a new business or short credit history.

Such loans will often use the equipment itself as collateral, which makes the loan easier to qualify for, though you do risk losing your equipment if you fail to repay the loan. The loan term will often be tied to the expected lifespan of the equipment.

Invoice factoring

Prolonged waits on invoiced payments can seriously affect a business’s cash flow. With invoice factoring, a business sells its unpaid invoices in exchange for a cash advance, typically 70% to 90% of the value of the unpaid invoice. The factoring company will then collect payment from your clients and send the remaining balance to you, minus a fee that it collects.

Merchant cash advances

Merchant cash advances are typically extended to businesses that rely on credit and/or debit card payments. This kind of advance provides you with a lump sum loan in exchange for a set percentage of daily or weekly credit card sales. You will continue to pay the daily or weekly percentage until the advance is repaid.

The amount you pay for a merchant cash advances is typically not based on an APR, however, but rather on what’s known as a factor rate. This rate, which can range from 1.2 to 1.5 (meaning 1.2 to 1.5 times the amount you borrow) can quickly get out of hand, however. If you calculate these factor rates as APRs, the APR you pay can range as high as 70% to 200%.

5 top alternative and non-bank lenders

To select the top five alternative and non-bank lenders we looked at a number of lenders. In addition to all being non-bank lenders, the lenders we chose had to meet the following criteria:

  • No more than two years in business required
  • Funding available in one to three business days
  • No prepayment penalties

1. BlueVine

Types of Loans OfferedLoan Amounts OfferedRateTime to Funding
Term loanUp to $250,000Starts at 4.80%Within hours of approval
Business line of creditUp to $250,000Starts at 4.80%Within hours of approval
Invoice factoringUp to $5,000,000Starts at 0.25% per weekAs fast as 24 hours

One of the big benefits of BlueVine is that it has no origination, prepayment, termination or maintenance fees. BlueVine’s term loans are available in 6– or 12-month terms, and you will pay a fixed weekly amount until the loan is paid in full. With the business line of credit, you will have 6 or 12 months to pay back your draw, with fixed weekly or monthly payments. You will pay a 1.6% to 2.5% draw fee every time you draw on your line of credit.

With invoice factoring, BlueVine provides 85% to 90% of the invoice amount upfront. Your customers will continue to make payments in your name, but the outstanding payments will go to the BlueVine account or P.O. Box and you’ll receive the remainder, minus BlueVine’s fees.

Both BlueVine’s term loan and business line of credit are available to any business that meets the following requirements:

  • Been in business for at least six months
  • Annual revenue of $100,000 or more
  • Personal credit score of 600 or higher

Businesses that cannot qualify for these loans may be eligible for invoice factoring, which requires only three months in business, monthly revenue of $10,000 or more and a FICO score of 530 or higher.

The business line of credit is not available in Vermont, and neither the line of credit nor the term loan are available in North Dakota or South Dakota. Invoice factoring is available across all states.

2. OnDeck

Types of Loans OfferedLoan Amounts OfferedRateTime to Funding
Term loan$5,000 to $250,000Starts at 11.89%Same day you are approved
Business line of credit$6,000 to $100,000Starts at 10.99%Same day you are approved

OnDeck has loaned out over $13 billion since 2007, making it one of the largest non-bank lenders. You can qualify for either a term loan or a business line of credit if you have:

  • Been in business for at least three years
  • A personal FICO credit score of 600 or above
  • Annual revenue of $250,000 or more
  • A business bank account

OnDeck promises instant funding as soon as you are approved. There are also no draw fees on the line of credit, unlike with BlueVine. However, you can expect to pay an origination fee for any kind of loan with OnDeck, as well as a $20 monthly maintenance fee for business lines of credit. You can potentially reduce your origination fee to 0% with subsequent loans though, and the monthly maintenance fee will be waived for six months if you make a $5,000 initial draw within five days of opening your line of credit.

3. Funding Circle

Types of Loans OfferedLoan Amounts OfferedRateTime to Funding
Term loans$25,000 to $500,0004.99% to 24.99%Within one business day after approval

Funding Circle has some of the more stringent guidelines for lending. To qualify for one of their term loans, you will need to have:

  • Been in business for at least two years
  • A personal FICO score of 620 or higher
  • No bankruptcies in the previous seven years
  • Located in an eligible state (Funding Circle does not operate in Nevada)

In addition, Funding Circle requires a lien on business assets and a personal guaranty from the business owner. However, there is no revenue requirement to qualify.

Loan terms can range from six months to five years, and your payment will be a fixed monthly amount. There are no prepayment penalties or maintenance fees, but you can expect to pay an origination fee of between 3.49% and 6.99% of the total amount borrowed. Additionally, there is a late payment fee of 5% of the missed payment.

4. National Funding

Types of Loans OfferedLoan Amounts OfferedRateTime to Funding
Term loan$5,000 to $500,000Not provided by lenderWithin 24 hours of approval
Equipment financingUp to $150,000Not provided by lenderWithin 24 hours of approval
Merchant cash advanceUp to $250,000Not provided by lenderWithin 24 hours of approval

National Funding has been in business since 1999, making it one of the oldest alternative lenders for small business. The lender does not specify its requirements for a term loan, but instead invites potential borrowers to fill out its application to connect with a loan specialist so that the lender can find the right loan for you. You won’t need collateral or a business plan to qualify, but you will have to sign a personal guarantee.

For the equipment financing loan, however, you will need to have been in business for at least six months, have a FICO score of over 575 and get a quote from a vendor for the needed equipment. Finally, any business that has been in business for at least a year and takes in at least $3,000 per month in credit card sales is prequalified for the merchant cash advance.

Though it is unclear how much you will pay in interest, National Funding focuses on offering a high approval rate, even to businesses with less-than-stellar credit. You can also receive early payoff discounts, as well as a variety of payment terms and options.

5. Kabbage

Types of Loans OfferedLoan Amounts OfferedRateTime to Funding
Line of creditUp to $250,0001.25% to 10.00% fee per monthWithin one to three business days

To qualify for a Kabbage line of credit, you only need to have been in business for at least one year, and take in $50,000 per year or $4,200 per month in revenue. There is no collateral requirement.

You may borrow from your line of credit in amounts as low as $500, all the way up to your limit. When you make a withdrawal, the money will show up in your bank account within one to three business days, or instantly in your Paypal business account. Each withdrawal is considered a separate loan, with a repayment term of 6, 12 or 18 months.

Kabbage’s interest rate is calculated monthly, which can mask how high an APR you are actually paying — according to ValuePenguin, the APR can range between 20% and 80%. The monthly fee ranges from 1.25% to 10.00%; however, there is no origination fee.

Pros and cons of alternative lending

Pros

There are a number of reasons why small business owners might choose to borrow with an alternative or non-bank lender. Benefits of alternative lending include:

  • Easier to qualify: With fewer and less stringent qualification requirements, alternative lending opens up funding opportunities for small business owners who may not otherwise be able to get the financing they need, especially if their credit is not excellent.
  • Rapid approval and funding: Alternative lenders approach the underwriting process differently from traditional lenders, which means they can both approve loans and release funds more quickly. This means small business owners can get the money they need when they need it.
  • Available to new businesses: Though traditional funding sources generally require a long history of profitability before extending a small business loan, alternative lending options will consider newer businesses for loans.

Cons

However, even though there are a number of excellent reasons to consider an alternative lender for small business financing needs, there are still some alternative lending hazards to beware of. This includes:

  • Confusing interest rates and fees: It can be difficult to compare apples-to-apples when it comes to alternative lending rates, since each lender uses its own methodology for calculating rates rather than clearly stating APRs. In addition, it can be difficult to determine exactly what and how much you will be paying due to additional fees, such as origination fees and draw fees, depending on the alternative lender you choose.
  • Shorter repayment terms: Alternative lenders often offer shorter repayment terms than traditional lenders. This helps to mitigate the risk to the lender, but it also means higher monthly payments for the borrower.
  • Less flexible payment options: Many alternative lenders require daily or weekly repayment, fixed repayment amounts or automatic ACH payments toward your loan. If your business has any cash-flow difficulties, this could cause some further financial problems.

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Investing

What’s the Best Age to Open a Roth IRA?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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The Roth IRA is often touted as a great savings vehicle for younger investors. Since the money you put into a Roth IRA has already been taxed, young investors can put money aside while their income (and tax burden) is lower, then reap the benefits in the form of tax-free withdrawals in retirement. But there is no age limit on Roth IRAs: You are allowed to contribute to a Roth IRA at any age as long as they are still earning income.

How old do you have to be to open a Roth IRA?

As a tax-advantaged investment vehicle, Roth IRAs have some strict eligibility rules. But unlike traditional IRAs, there are fewer age-related eligibility rules for Roth IRAs.

For instance, traditional IRA account holders must begin taking required minimum distributions (RMDs) as of age 72, while Roth IRAs have no such distribution requirement and you may leave money in a Roth account for as long as you live.

One age-related rule that both Roth and traditional IRAs share is the age at which account holders may begin making withdrawals without facing a penalty. In both cases, that age is 59 and a half. Until you reach that magic number, both Roth and traditional IRA distributions will be subject to the 10% tax penalty. In addition, you cannot take a penalty-free distribution from your Roth IRA earnings if it has been less than five years since you opened it.

No matter your age, as long as you have earned income, you can open a Roth IRA. However, your total modified adjusted gross income (MAGI) will help determine how much you can set aside in your Roth IRA. In 2020, the contribution limit for both traditional and Roth IRAs is $6,000, rising to $7,000 for filers who are age 50 or over. It’s important to remember that this contribution limit is applied to all of your IRA accounts if you have more than one. This means your total contributions to all of your traditional and Roth IRAs cannot be more than $6,000.

Taxpayers who are married filing jointly can contribute up to the maximum amount to their Roth or traditional IRA if their MAGI is below $196,000. A married couple can contribute a reduced amount if their MAGI falls between $196,000 and $206,000, and couples earning more than $206,000 may not contribute to a Roth IRA in 2020. Single filers are eligible for a full contribution up to a MAGI of $124,000, a reduced contribution between $124,000 and $139,000, and may not make a contribution with a MAGI above $139,000.

Basically, as long as you make at least $6,000 and make no more than the MAGI limits for your filing status, you can contribute the full amount to your Roth IRA, no matter your age.

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Roth IRA benefits for young contributors

  • Pay taxes at a lower level: Provided you wait until age 59 and a half (and own the Roth IRA for at least 5 years before making a distribution), you can access the money in your Roth IRA tax-free. This means a younger contributor could pay a lower amount in taxes on that money, since their tax bracket is likely to be lower now than it will be later in their career or even in retirement. In addition, since it’s impossible to know exactly what kind of tax burden you will be facing in retirement, having money in a tax-free vehicle provides you with a hedge against future taxes.
  • Compound interest: In addition to your distributions being tax-free in retirement, your contributions grow tax-free, which means you get to enjoy all of the gains from your investment in retirement instead of having to see some of those gains lost to taxes. The other benefit of compound interest is the fact that it can make even modest early contributions grow to something quite robust.
  • Future income hedge: If you expect to eventually make too much money to contribute to an IRA, investing in a Roth IRA early in your career can guarantee you the benefit of compound interest and tax-free growth even after you stop being eligible to contribute.
  • Access your contributions tax-free: While you would have to pay taxes and penalties on withdrawals from your gains in a Roth IRA, the amount that you contributed can be withdrawn tax- and penalty-free, because that money has already been taxed. This makes the Roth IRA a much more flexible account than other tax-advantaged retirement accounts.

Roth IRA benefits for older contributors

  • Diversify your retirement income Social Security benefits, pension benefits and withdrawals from traditional IRAs and 401(k)s are all subject to taxation in retirement. In fact, the amount of taxes you will owe on your Social Security benefits depends in part on how much income you have from your pension, traditional IRA or 401(k). By having a Roth IRA set up so that you have a source of tax-free income in retirement, you can give yourself a little more control over your tax burden.
  • Estate planning: Since you are not required to take distributions from your Roth IRA as of age 70 and a half, you can use your Roth IRA as a method of passing money along to your heirs tax-free. By naming your heir as a beneficiary of your Roth account, the money could pass to your heir without being subject to estate taxes. Do note that inherited IRAs are subject to required minimum distributions, even in the case of Roth IRAs.
  • Compound interest is still your friend: Because you are not required to take required minimum distributions as of age 70 and a half, older Roth IRA contributors can get the benefit of compound interest in ways that they could not with a traditional IRA. Even if you do not open a Roth IRA until after age 40, 50, or later, you can leave the money in the account for as long as you like, potentially giving it decades to grow before you access it. A traditional IRA puts a cap on that potential for growth by forcing you to take RMDs as of age 70 and a half.
  • Backdoor Roth conversions can open up your eligibility: Even if you make more than the income limit for contributions, it is possible to convert your traditional IRA into a Roth account using what’s called a “backdoor Roth conversion.” Before you convert your entire traditional IRA, don’t forget that you’ll owe taxes on any pre-tax money and growth that gets transferred to your Roth IRA.
  • Catch-up contribution limits: Investors over the age of 50 may contribute a full $1,000 more per year than those under the half-century mark. This means an older Roth IRA contributor can set aside $7,000 in 2020.

The bottom line

There’s no one right time to open up a Roth IRA. Whether you are a fresh-faced recent college grad or the grizzled veteran at your workplace, you can benefit from a Roth IRA. Just make sure you understand the potential advantages and disadvantages of setting aside already-taxed money into a Roth IRA.

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Investing

Reverse Rollover: Maximizing Your Retirement

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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Rolling over a 401(k) into an IRA is a common process that can help a saver maintain control of their retirement investments even when they part company with the employer providing their 401(k) plan.

Fewer people are familiar with the so-called “reverse rollover,” wherein an IRA account holder rolls over those funds into an employer-sponsored 401(k). Though less common, there are a number of reasons why a saver might want to consider it — as well as several drawbacks. Here’s what you need to know about these accounts and how reverse rollovers between them can work.

Differences between an IRA and a 401(k)

While both of these accounts offer tax-deferral benefits, there are a few important differences to be aware of when choosing either type of account. In addition, it’s important to remember that you may open and contribute to each type of account at the same time, so a rollover may be unnecessary if you are eligible for both account types.

The important differences to remember between IRAs and 401(k) accounts are their contribution limits and income limits:

  • Contribution limits: For 2020, the IRA contribution limit is $6,000 ($7,000 for those over age 50), and the 401(k) limit is $19,500 ($26,000 if over age 50). You can contribute to both a 401(k) and an IRA at the same time, so if you are able to do both, a rollover may not be necessary to increase your total contribution limit.
  • Income limits: IRAs also have a lower compensation limit for receiving the tax-deferral. Savers eligible for an employer-sponsored retirement plan receive a full tax deduction for IRA contributions if their income is less than $64,000 ($103,000 for married couples filing jointly). For 401(k) accounts, the income limit is $285,000 before savers lose the tax-deferral.

Though you can hold both accounts at the same time, you may still be interested in a reverse rollover. There are some important benefits and drawbacks that you should be aware of.

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Reasons to choose a reverse rollover

  • Easier Roth conversion: The Roth IRA is funded with already-taxed dollars, which means it grows tax-free and you can take tax-free distributions in retirement. However, if you are single and make more than $139,000 or married and make more than $206,000, you cannot contribute to a Roth IRA, but you can convert a traditional IRA into a Roth. You’re required to pay taxes on any money in the account that has not already been taxed. So if you have a mix of pre- and post-tax money in your IRA, you can move the pre-tax money into a 401k before doing the Roth conversion. That will leave any post-tax contributions in the IRA available to convert into a Roth IRA without paying any more taxes at the time of conversion.
  • Bankruptcy protection: 401(k) accounts are qualified accounts under the Employee Retirement Income Security Act (ERISA) and not considered to be part of your bankruptcy estate. Until 2005, IRAs had no such protection, but the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA) exempted a portion of IRAs from bankruptcy estates. The IRA amount exempted is currently more than $1 million.
  • Earlier access to funds: Both 401(k) accounts and IRAs have stiff tax penalties for accessing your funds prior to reaching age 59 and a half. However, a 401(k) account holder who leaves their job anytime during or after the year they turn 55 may take distributions from the 401(k) without penalty.
  • Postponed distributions: 401(k) accounts may help postpone required minimum distributions (RMDs), which are the mandated amount you must withdraw from tax-deferred retirement accounts at age 70 and a half. There is no getting around IRA RMDs, but if you are still working at age 70 and a half, you may postpone distributions from your 401(k) until you retire.
  • 401(k) loan options: In a bad financial crunch, you may be able to take a loan from your 401(k) without paying taxes on the withdrawal. You’re required to repay the loan with interest (to yourself) within five years, and if you separate from your employer before you have paid back the loan, it’s considered a distribution, triggering taxes and penalties.

Reverse rollover downsides

  • Fewer investment options: 401(k) plans offer fewer investment options than IRAs, so anyone who wants to hand-pick their investments would be happier sticking with an IRA.
  • Access for higher education and home purchase: While both IRAs and 401(k) accounts allow you to take early, taxable distributions without penalty because of hardship such as disability, medical, or funeral expenses, only IRAs allow such an early, penalty-free (but taxable) distribution for higher education or a first-time home purchase.
  • Indirect rollovers can cost you: With an indirect rollover, your IRA cuts a check for you to deposit into your 401(k). However, your IRA administrator is required to withhold 20% of your distribution for federal taxes. For instance, if you’re rolling over $25,000, you will receive a check for $20,000 and the remaining $5,000 will be sent to the IRS. But you will still be required to deposit the full $25,000 in your 401(k) or face the tax penalty.

How to roll over an IRA into a 401(k)

Start by making sure that your 401(k) plan will accept a rollover from your IRA, since not all plans do. Get your 401(k) set up before you initiate the rollover because you only have 60 days to get the money from one account to the other without a penalty.

Ask your 401(k) plan administrator how to do a direct transfer, where your IRA administrator makes the payment to your 401(k) and you face no tax or penalty. If the money comes to you first in an indirect rollover, 20% of the amount is withheld and you must make up the difference.

Bottom line

Rolling over an IRA into a 401(k) can provide you with a higher contribution and income limit for tax-deferrals, more control over when you take your distributions, an opportunity for an easier Roth conversion, and more financial protection if you face serious money troubles. But it can also limit your investment choices, make it harder to pay for education or a home, and can be costly in the case of an indirect rollover. Savers interested in a rollover IRA to 401(k) must understand all of the ramifications before they commit.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.