Three Reasons for the Rise of Alternative Lending
By Rohit Arora, CEO of Biz2Credit
While the credit market for small businesses has been steadily improving, there are still ups and downs. Small banks are approving more than 50% of business loan requests for the first time since the Great Recession, while big banks, though improving, still approve less than one in five applications. Credit unions seem to have reached their peak, according to the most recent Biz2Credit Small Business Lending Index, which tracks loan approvals on a monthly basis.
As banks remain slow in approving expansion loans and business lines of credit to cover short-term cash flow issues, alternative lenders, filled the void for entrepreneurs in need of funding to cover cash flow issues and other capital needs. The category is filled by tech-savvy entrepreneurs who make money available quickly and efficiently to companies that often cannot secure financing from banks, which tend to be more conservative in their lending parameters. They offer loans for as little as $5,000 and as much as to $2 million, in my experience.
Cash advance companies, accounts receivable financiers, factors, and micro lenders all have become increasingly more attractive funders for three reasons: flexibility, use of technology, and speed.
Banks essentially cut off the flow of small business credit after the financial crisis in 2008. This left the door wide open for other lenders to fill the void for small business owners in need of startup or expansion capital. Big bank lending parameters became increasingly strict. Even today it is very difficult to secure startup funding from a big bank (assets of $10 billion+), in part, because many of them want an entrepreneur to show 2-3 years of revenue in order to approve a loan. Obviously, a startup cannot provide such information.