Updated: Mar 22
Even before the COVID-19 pandemic threw the economy into a mess, small and medium-sized business (SMB) owners were already moving away from traditional lenders when seeking financing.
According to Dun & Bradstreet, the number of businesses trying to raise funds is on the rise.
Nonetheless, while fewer SMBs sought financing from conventional banks, they also noted
declining success rates for credit applications. Actually, the SME Finance Forum notes that there is a funding gap worth about $5 trillion between what traditional lenders are prepared to loan out and the demand from SMBs.
As we proceed onwards, this trend is unlikely to change. To some extent, the economy is still in disarray, meaning that banks will be hesitant to offer loans to smaller businesses. It goes without saying; the alternative lenders are left as the best option for SMB owners seeking business financing.
Alternative Lending Defined
Alternative lending has been around for decades, as people have always sought credit sources that don’t involve banks. But, alternative lending, as we know it nowadays, gathered popularity in the aftermath of the 2008 financial crisis. As SMBs found it harder to secure financing from conventional banks, other options became preferable.
Well, alternative lending provides businesses with an array of financing options. An entrepreneur wishing to start their own landscaping company or food truck business will need funds to buy equipment and vehicles. Or, ultimately, they may want to expand their venture with a few extra trucks.
These are the types of businesses that banks usually refuse to advance credit to and which can be an ideal fit for alternative lending.
Alternative Lending is a Rationalized Way to Obtain Financing
As Forbes plainly puts it, “For every bank that says ‘no,’ there are alternative financiers who are eager to say ‘yes.’” The U.S’s Treasury department carried out an in-depth study and found out that marketplace lending is “a fast-growing sector that is constantly evolving.”
Another study established that alternative financing will remain a “permanent part of the
landscape.” Again, the main reason for this dominance is that alternative lenders provide credit to those small businesses that would often get snubbed by banks.
Bad Credit History? No Worries for Alternative Lenders
One of the key factors differentiating banks from alternative lenders is how strict they are to entrepreneurs with bad FICO or credit history. Every bank’s credit score or FICO requirements are different; however, on average many will need to see a credit score higher than 711. Credit scores lower than that will attract a higher interest rate.
By contrast, most alternative financiers have more lenient qualifications. They are always willing to overlook bad credit history and place more emphasis on your business’s health instead. Mostly, alternative financiers will be interested in seeing if your cash flow can support repayment. In short, you do not need to have a perfect score to get financing!
A Range of Options Available To You
When it comes to financing your business, think of banks as shops that can only sell a few
products. These products are only relevant to a small cluster of customers. On the other hand, an alternative lending marketplace is like a supermarket that carries a variety of products.
While reviewing these options and products, though, you should consider several things. You
will want to consider the interest rate, loan terms, and other key elements. By doing this, you can choose the best from among the various aisles of financial product options in the marketplace.
Here are some popular options offered via alternative lending:
Unsecured Business Financing: A wonderful funding option for businesses that don’t hold many assets or any company that is growing rapidly and needs finance fast. Small Business Administration (SBA) Loan: These are loans issued by alternative lenders but partially backed by the government. They have low-interest rates and flexible terms, making it one of the most practical ways to finance a business. Equipment Financing: Whether you need to repair a dump truck, buy a new tractor- trailer, or acquire new computers for your office, you can make it happen through equipment financing.
Accounts Receivable Loans: Source of funding where you can use your account receivables as security or collateral to raise funds from an alternative lender. Commercial Real Estate Financing: Perfect for companies wishing to purchase properties used for business purposes.
The Bottom Line
Banks are here to stay. They will continue to provide funding, particularly to large businesses that need large amounts of capital. However, for the thousands of SMEs across the country, the affordable and flexible funding solution they want and deserve is alternative lending.
Here at Latter Financial Group, we help every kind of business raise the capital they need. Nobody knows alternative lending than us. Contact us today if you have any questions or wish to learn more about our various financial products.