Alternative Lending Will Provide a Lifeline to Small Businesses in a Post-Pandemic World
By Oz Konar
Even before the pandemic threw the economy into disarray, small business owners were increasingly moving away from banks when seeking funding. According to data published by Dun & Bradstreet in 2019, the number of businesses attempting to raise financing is on the rise. However, while fewer SMBs actively sought loans from a traditional bank, they also reported decreasing success rates for credit applications. In fact, according to the SME Finance Forum, there’s currently a funding gap worth $5 trillion between what banks are prepared to lend and the demand from small and medium-sized businesses.
As we look towards a post-pandemic scenario, it seems unlikely that this trend will change. The economy has a long road to recovery, meaning that banks will be increasingly reluctant to provide credit to smaller businesses. The irony is that some of America’s leading companies, from General Motors to CNN, to Uber and Airbnb, emerged during economically challenging times.
Therefore, rather than banks, the growing sector in alternative lending is best placed to provide a lifeline to the current generation of entrepreneurs seeking business financing.
What is alternative lending?
Alternative lending has been around for centuries, as people have always wanted reliable credit sources that don’t involve banks. However, alternative finance as we know it today emerged as a result of the shift to digital and gathered pace in the aftermath of the 2008 global financial crisis. As small businesses found it more difficult to secure financing from banks and regulations increased capital costs for the banks themselves, other options became more popular.
Peer-to-peer lending platforms paved the way for so-called “nonbanks” that provide particular financial services, including mortgage lending, credit card operations, and small business loans.
Now, alternative lending offers businesses a range of financing options. A lone entrepreneur wanting to start their own food truck or landscaping company will need an initial cash boost to purchase vehicles and equipment. Or, once they’ve established their initial enterprise, maybe they want to expand the company with a few extra trucks or some fixed premises.
These are the kind of businesses that banks often refuse to lend to and which can be a perfect fit for alternative lending.
How to access alternative lending
The best way to access alternative lending is through a business loan broker. Although alternative lending offers many benefits over and above going to your bank manager, it can still be a time-consuming exercise to do the research, find a reputable lender, work through the various options available, and agree on terms. A broker can handle all this effort. Furthermore, a broker has already established relationships with a broad range of lenders, meaning that they can potentially find better terms for you than you’d get by going out to the open market by yourself.
However, apart from freeing up your bandwidth, a business loan broker offers a more valuable service than simply saving you time and money. Alternative lending brokers also bring a wealth of knowledge and understanding regarding the loan markets and offer a more tailored approach.
Consider that banks tend to look at small and fixed data points when assessing loan requests, such as credit scores, cash flow, or collateral. A broker will work with the individual circumstances of the borrower to determine the desired outcomes. For example, a business owner might have a poor credit history, so a broker could connect them with companies to help them raise their credit rating. It may be that a business owner could use part of their existing personal assets, such as real estate or retirement savings, as collateral, which banks wouldn’t always consider.
Business Loan Brokers work with companies that specialize in startup loans and can access specific types of lenders tailored to other lines of credit, such as borrowing for equipment or premises. They can also help determine the best options between leasing or purchasing and finding the best deal on offer between the two. It may also be that a business already has assets, which can be used as collateral for raising credit to purchase other assets.
A more competitive lending environment
As alternative lending options become more available and banks become ever more unwilling to take a risk on small businesses, entrepreneurs will increasingly simply bypass the banks entirely. Currently, the alternative finance sector is growing by around 17% year on year, and business lending accounts for around 70% of that. Therefore, it seems inevitable that as more lenders enter the market, it will become more competitive, to the benefit of entrepreneurs. With more options to choose from, brokers will offer a broader range of lending choices at the best rates available on the market.
Furthermore, as alternative lending becomes more prevalent, it will no longer be an alternative but the norm. Eventually, banks may find that they’re missing out on a burgeoning segment thanks to their unwillingness to engage with small business owners.
Oz Konar, Founder of Business Lending Blueprint, has built an eight-figure business in the business loan brokerage industry and helped thousands of ordinary people generate millions of dollars in revenue through their own businesses and gain financial literacy through his coaching programs. He’s been featured in many major publications and received the prestigious Two Comma Club award twice.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.