The primary struggle many small business owners face is maintaining financial solvency. By solvency we don’t mean, “do you earn enough gross revenue to cover your expenses?” We mean, “does your cash flow allow you to make the decisions you need to make week by week, month by month throughout the year?” Even before the pandemic turned the economy upside down, companies of all sizes have had to get creative about managing their expenses and cash flow. A month without earnings, for many small businesses, means shuttered windows, even if sales will help you get back on plan in a month or two.
Since the financial crash of 2008, traditional banks have become much more conservative with their lending options. In many cases, startups and small businesses may struggle to get approved for a loan, making it difficult to get up and running. Fortunately, alternative lenders have swooped in to pick up the slack.
In this article, we are going to look at the current state of alternative lending. We will discuss why it has become vital and where the industry is headed for the future.
What is Alternative Lending?
Basically, any lender that exists outside of the traditional bank structure can be considered “alternative.” One of the benefits of working with a bank is that the federal government secures the loan, and banks are regulated by the Securities and Exchange Commission (SEC).
Because alternative lenders work outside of this bubble, they have much more flexibility regarding who they can finance and how much they can lend. In many instances, startups and small businesses that would get declined at a bank may find luck with alternative lenders.
Some examples of alternative lending can include:
-Hard Money Loans.
Usually, these loans are financed by an independent party who looks at the value of a specific project. For example, a lender may help fund the purchase of real estate, using the property as collateral if the borrower can’t pay the loan.
-Factoring.
Rather than borrowing money from a bank, a company can leverage outstanding invoice balances. Since clients are the ones on the hook for payment, businesses don’t need a strong credit history, nor do they have to pay anything back.
-Equipment Financing.
When a company needs high-end equipment or machinery, an alternative lender can use the item as collateral to fund the loan.
Overall, alternative lenders offer many different solutions for borrowers. In most cases, the approval process is much faster, with some lenders offering same-day payments. Because of the versatility of alternative lending, more and more business owners utilize this tactic instead of going to a bank.
By the Numbers: How Businesses are Utilizing Alternative Lending Resources
Back in 2019, a survey done by Dun and Bradstreet and Pepperdine University illustrated how much alternative lending has grown in recent years. While the current pandemic is affecting the industry across the board, this data shows that more companies are turning to alternative lenders for financing. Here are some of the details from that report.
-Forty-one percent of businesses reported that they sought a traditional bank loan. In quarter one (Q1) of 2019, that number was 49 percent.
-Of those who applied for a bank loan, only 32 percent of small businesses (less than $5 million in sales) were approved. By comparison, only 89 percent of mid-sized companies (sales between five and $100 million) were approved. Both of these numbers showed a decrease from the previous quarter.
-When accounting for alternative lending resources, 53 percent of companies applied for a business credit card, 20 percent turned to crowdfunding, 29 percent worked with online lenders and 15 percent utilized factoring services.
Why Are Businesses Turning to Alternative Lenders?
Although the data shows that companies are seeking alternative lending sources, it doesn’t offer insight into why. Here are some of the most compelling reasons why alternative lenders are becoming the norm.
-Fast Financing.
Typically, it can take between 30 to 60 days to get funding through a traditional bank. In some cases, companies can get cash within a day or so from alternative lenders.
-Flexible Borrowing Options.
If a company only needs to borrow a small amount, most banks or credit unions will decline it. Alternative lenders allow business owners to borrow as much or as little as they need with microloans.
-No Credit History Required.
Usually, startups have the hardest time securing a loan from a bank, since they don’t have a credit score. Alternative lenders can provide financing when other institutions can’t or won’t.
How COVID-19 is Affecting Business Lending
Because of the current pandemic, many small businesses are struggling to maintain a positive cash flow. While it’s still unclear what the long-term ramifications of COVID-19 will be on the economy, it will likely boost alternative lending even further.
A significant reason why the shift will only continue during and after the pandemic is risk assessment. Large banks and institutions will tighten their lending processes even further to mitigate any potential losses. As that happens, companies will have to turn to alternative resources to help cover expenses. Because alternative lenders already have more flexibility and are more willing to accept risk, they’ll be able to maneuver throughout the pandemic and its aftermath.
We would not be surprised if the pandemic creates a sharp uptick in alternative lending. Although government funding programs are helping to bridge the gap, banks will likely be wary of small business financing for the foreseeable future. If these companies want to survive, they’ll have to get creative.
Contact Us Today
If you’re interested in obtaining alternative financing, we can help. We have a vast network of brokers and lenders that can help your business stay afloat now and into the future. Visit us online or give us a call to find out more.