The True Difference between Alternative Lenders and Banks

The True Difference between Alternative Lenders and Banks

A lot of misconception has arisen around the alternative lending field as it relates to conventional bank financing.

Part of the issue is that alternative financing can refer to a plethora of different programs. Bridge loans, equipment financing, merchant cash advances, crowd funding, and hard money loans all can be classified as “alternative”. In general, there are four characteristics that separate an alternative lender from a bank.

First, the source of capital. Banks use one of two sources to lend: deposits and/or “warehouse” lines of credit. The warehouse L.O.C.’s come from other, larger, banks, often through the federal system.

Private lenders generally draw from a private pool of capital. That private pool can consist of several wealthy investor individuals, a family office(s), or institutional money (e.g., insurance firms).

The primary difference is that the bank capital is highly regulated, whereas the alternative lender capital is not.

Second, the flexibility of the lender. Since alternative lenders are not subject to FDIC regulations they can be more creative in structuring their transactions.

While they still have to fully underwrite (document) their loans, in order to protect their investors, they are able to craft solutions that banks cannot because of their FDIC restrictions.

Third, the requirements for repayment methods are less stringent with alternative lenders. A bank will generally require verification of three different ways to get the loan repaid.

For instance, in a commercial real estate loan they may want to see that the property produces enough revenue to make the loan payment.

As a backup to that they may want to verify that the borrower has enough personal income, or assets to liquidate, to make the payments should the property stop producing enough revenue. And as a further backup to that they will make sure that there is enough equity in the property (Loan-to-Value) that should they have to repossess the property they can sell it for enough to make themselves whole.

Alternative lenders generally will look for a solid exit strategy, verify that, and satisfy themselves with a single backup option.

Finally, the decision making process. Bank applications start with a loan officer. Then the loan request is sent through the underwriting department.

If it is acceptable from that point it is then sent to a loan committee for review. The committee consists of several officers of the bank. Finally, if the committee approves it then the Chief Credit Officer has to sign off on it. An alternative lender will often mimic the first two steps but thereafter differs. Often there is a fund manager who holds sole approval power.

If not, they may have a very small loan committee of 2-3 people who can decide quickly. Banks have regularly scheduled loan committee meetings; alternative lenders make loan decisions as the underwriting is completed. This makes them much more responsive.

In short, because they do not have to deal with multiple regulating bodies and burdensome compliance issues, alternative lenders can be much more flexible and timely than a bank.

The need for alternative sources of capital in the commercial real estate industry has never been greater. Winston Rowe & Associates is a capital source that provides flexible, reliable and timely solutions for owners of commercial real estate nationwide.

When experience is important and timing is crucial. When you contact them, a principle is always available to speak with prospective clients. They can be contacted at 248-246-2243 or review them on line at

Staff Writer

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