[Originally published May 2018; last updated October 2020]
When you're a business owner who needs money but lacks the sufficient capital, banks serve as one of many potential cash flow resources. According to the most recent statistics available from the Federal Deposit Insurance Corporation, more than two-thirds of households in the U.S. are fully banked, meaning they have access to traditional banking products like checking and savings accounts, in addition to loans products.
Banks are hardly the only outlet to obtain financing for your business. Private loan originators serve as another cash conduit, and many Americans take advantage of them, as they are lauded for speedy approval times and simple application processes. There's also many of them that specialize in specific loan products or cater to certain types of business operations.
When it comes right down to it, you want a lender with the experience you can trust and who will be there for you every step of the way, especially if your lending needs change often. With that in mind, here are some of the typical aspects that are part and parcel of working with a private originator and why banks serve as the smarter, safer alternative:
Interact solely with the originator
When you go through a private loan originator to obtain funding of financing, you're actually dealing with the middleman. Startups firms or individuals who are new to business owning may be of the belief that originators are the source of the money sought, when in actuality they're the go-between, relaying information to and from and charging for it to boot.
When you seek a loan straight from a bank or other financial institution, the middleman is eliminated, speeding up the transaction process and removing potential stumbling blocks to clear communication. It's easy for intermediaries to misunderstand your stated intentions, but by circumventing them – going straight to the source – it reduces the chances of requests or inquiries getting lost in translation.
Exorbitant upfront and/or hidden fees
Private loan originators are perhaps best known for the speed with which they render loan decisions, often within 48 hours or sometimes even less than that. They may also not require much in the way of paperwork to ensure you're a good loan candidate.
These perks, however, aren't without their drawbacks. To cover their financial bases, private originators frequently charge ultra-high interest rates, in part to guard against the potential that the loan isn't repaid. What's more, private lenders may also tag on other fees that are hidden in the fine print.
You're less likely to experience sticker shock when borrowing directly from a bank. In addition to charging lower interest rates, banks are beholden to strict lending rules, governed and dictated by the Federal Reserve, which require financial institutions to be fully transparent about all aspects of the lending process so borrowers always "know what they owe," to paraphrase the Consumer Financial Credit Bureau.
In other words, banks have reputations to uphold. The rules and regulations established by the federal government aid in obtaining and maintaining the public's trust.
Privacy protections go out the window
There's no denying private loan originators are known for quick services. In fact, it may be their most well-established character trait, resulting in a proliferation of online lenders in recent years as business owners have a "need for speed" when it comes to business functions that require money.
Having said that, originators can't afford to be bilked by fraudulent applicants, which is why they often turn to various identity verification instruments that help them better determine whether borrowers' previous purchase or application behaviors raise any red flags. Due diligence is a standard component of loan evaluation, but the problem with originators is they may obtain sensitive information about applicants that borrowers weren't aware of or unwillingly assented to.
The opposite is true for banks. The FDIC has very strict standards on what financial institutions are permitted to obtain from loan applicants regarding their personal identity. Established by the Gramm-Leach-Bliley Act of 1999, the law requires banks to inform customers of the amount and type of personal information utilized, most of which is provided by the borrower.
The level of oversight isn't nearly as rigorous with private originators.
A subsidiary of Synovus Bank, Global Financial Distributors is a licensed insurance agency you can trust for many of your business needs. While we specialize in life insurance financing, our affiliation with Synovus Bank enables us to offer direct lending capabilities as well.