When Marlon Davis, owner of Nesberrys in Valley Stream, needed $12,000 to increase storage space and purchase new freezers for his 2-year-old Caribbean ice cream business, he didn't pursue traditional bank financing.
Davis didn't have the time to wait for what could be a lengthy approval process, and because his company was fairly young, he wasn't confident he'd get a traditional bank loan, he says.
So instead, with the help of Lendio, an online broker between loan providers and small-business owners, he secured a loan from an online alternative lender, OnDeck, within a couple of days.
"We had the customers lined up," explains Davis, who has stores in Valley Stream, West Hempstead and Jamaica, Queens. "We just didn't have the funding for the equipment we needed."
The loan allowed him to increase storage space by more than 50 percent and purchase 10 new freezers to place in restaurants around Long Island, Queens and Brooklyn and fill them with takeout containers of his ice cream, which comes in flavors such as Rum & Raisin and Sorrel & Ginger.
It's this kind of quick turnaround and ease of getting funds that's led many companies like Nesberrys to seek non-bank alternative financing.
A recent SurePayroll survey found that 36 percent of small businesses said they'd use an alternative lender compared to only 13 percent two years ago.
Willing to lend: "They're willing to provide capital to small businesses," says Ty Kiisel, author of "Getting a Business Loan" (Apress; $24.99) and director of content marketing at South Jordan, Utah-based Lendio.
Banks are generally more stringent and "want borrowers with a low-risk profile, really good credit scores and collateral," he explains.
That's why many firms have turned to alternative lending options, although it's more expensive capital compared to traditional bank loans, and it's not regulated by the federal government, says Kiisel.
Davis paid about a 19 percent markup on his six-month loan. So for the $12,000, he'll have paid $14,250 by the time it's paid off in September. A typical bank loan carries a 5 percent to 7 percent interest rate, say experts.
OnDeck deducts a fixed, daily payment directly from Nesberrys' business bank account each business day, which equated to about $75 daily for Davis, who estimates a 50 percent revenue increase thanks to the new equipment purchases.
Crunch the numbers: Still, borrowers need to crunch the numbers to make sure they know what they're getting into, says Ami Kassar, founder of Ambler, Pennsylvania-based MultiFunding LLC, which connects small businesses to sources of financing.
"Think about what it's going to cost you and can you afford it," says Kassar. "They need to have a good plan on how to work their way out of the loan."
Also, be aware if there's a prepayment penalty, and understand if the lender is going to file a lien on your business assets, he notes.
OnDeck loans are backed by a personal guarantee, and in most cases a lien is filed on the assets of the business, according to Andrea Gellert, OnDeck's senior vice president of marketing.
Loans range from $5,000 to $250,000, with the average at about $40,000, and the average length is six to nine months, she says. Since 2007, OnDeck has doled out more than $1 billion in loans.
Despite the appeal, you must do your homework, says Ronni Rosen, senior business adviser at the Small Business Development Center at Stony Brook University.
Check with the Better Business Bureau and attorney general's office of the lender's home state to see if there are any complaints, she advises.