Are alternative credit solutions right for you?

Affluent individuals often have a complex array of income sources and sophisticated financial needs that require more than traditional bank loans. As a result, many borrowers turn to alternative forms of credit that better fit their goals.

The term “alternative credit” refers to credit offered by an entity other than a traditional bank or credit union. This category includes loans from one individual to another (known as peer-to-peer credit), as well as credit from private equity firms or specialized lending groups, such as those focused on high-end automobiles or luxury real estate. Alternative lending also takes place through online platforms that match borrowers with individuals or groups providing capital.

Affluent individuals often choose alternative credit as a way to move quickly when they need funding. For example, they may need capital to fund an unexpected business opportunity or buy a property in a competitive real estate market. They might also consider alternative credit if they want to borrow against low-liquidity assets, such as a business partnership or hedge fund position.

Tip 1: Determine which application and repayment process fits your needs. Banks follow structured, compliance-driven models when they consider loan requests. Alternative credit often takes a customizable approach that considers your assets, cash flow and broad financial strategy. Alternative credit can also provide repayment schedules that factor in irregular income timetables or other customized loans.

Tip 2: Consider speed and flexibility as well as cost. Traditional lending provides the security of strict regulatory oversight, formal underwriting processes and disclosure requirements. These processes are standardized, so interest rates are typically lower than those offered through alternative credit. However, underwriting requirements can slow the lending process, and banks are unlikely to offer tailored repayment options.

Tip 3: Take advantage of typical alternative credit use cases. Entrepreneurs and business owners might consider alternative credit for growth capital or to manage cash flow without diluting equity. Alternative credit also can work well in succession planning or tax strategy when individuals need early access to funds for estate obligations or to restructure debt within a family office.

One of the major benefits of alternative credit is that it can provide funds for immediate needs without disrupting a wealth management plan. For example, you could access funds for a real estate deal without having to sell stocks or bonds.

However, alternative credit does come with risks. Interest rates and fees may be higher with alternative credit because the lender is taking on more complexity or risk. Also, hidden fees, prepayment penalties or restrictive legal agreements may limit your flexibility down the road if not properly negotiated.

You can mitigate the risks of alternative credit by working with experienced legal and financial advisors. These professionals can help you scrutinize loan terms and ensure the agreement aligns with both your short- and long-term goals.

When deciding whether to work with an alternative credit provider, look at their track record. How long has it been in business? Can you speak with past clients as references?

It’s also important to understand the collateral lenders accept and the underwriting criteria they use. Pay attention to whether they demonstrate integrity and transparency in their dealings with you.

When used strategically and with proper due diligence, alternative credit can be a powerful tool for preserving wealth, seizing timely opportunities and maintaining long-term financial agility.