The current banking system in America was established in the early 19th Century. Since then, financial crises have forced a few major changes. The biggest modern change took place in the 1990’s when Congress approved interstate banking; thus paving the way for the huge corporate banks that we’re familiar with today.
The truth is that big banks don’t particularly like lending to small business…
The recession proved that we are now living in the era of banks that are “too big to fail” – much to the detriment of small business. A recent study found that small business owners who unsuccessfully applied for financing were most often rejected by large banks. The banking industry claims that the recession is the reason for the decline in small business lending but some statistics suggest that the trend has been progressing for far longer than five years.
The truth is that big banks don’t particularly like lending to small business. A $300,000 loan just isn’t as profitable as a $3,000,000 loan. And we have created a system where the smaller banks and credit unions that do specialize in lending to small business are struggling to remain profitable.
As traditional lending institutions have failed to adopt policies that are favorable to small business, the alternative financing industry has stepped up to fill the capital void. Financing companies with a true desire to serve small business by increasing access to flexible sources of capital are emerging.
Here are five ways that alternative financing is changing small business lending for the better:
- New Technology: We live in a digital world where new technology is emerging every day. We can print three-dimensional dresses and accept credit card payments from our cell phones. Until recently, financing wasn’t synonymous with innovation. Alternative lenders have changed that by creating forward thinking business models that leverage emerging technologies. One example is The Receivables Exchange. They created an online marketplace where business owners can sell unpaid invoices to a network of institutional buyers in real time. Business owners receive a cash advance in as little as 24 hours.
- Creative Financing Models: Alternative financing companies are emerging in all shapes and sizes. The variety of financing options are allowing small business owners to find a source of financing that best suits their own business model. Companies that face seasonality issues might benefit from invoice financing or revenue-based financing models. Startups are finding success with Angel investors, crowdfunding, and micro lending. And this is just the tip of the iceberg.
- Flexibility: One of the greatest advantages of alternative financing is the flexibility it can provide a small business. Business owners are finding they can get exactly the amount of working capital they need – exactly when they need it.
- Come One, Come All: Many of the early adopters of alternative financing were the bank loan “undesirables”. Business owners with bad credit, from non-traditional industries, and young companies will no credit history have all found success securing financing with alternative lenders. For many years a lack of competition in the industry made the cost of alternative capital higher than bank loans. But as more and more financing companies emerge, businesses of all sizes, and from all industries, are finding that alternative financing is an increasingly affordable way to fund their operations.
- Speed and Ease: Getting a business loan at a bank used to be a fairly simple process. In most cases, showing up with a decent personal credit score and a completed application was all you needed. Today, the approval process has become rigorous. Owners often spend months preparing to apply for a loan, jump through hoops to provide documentation, and then wait weeks for an answer – only to be denied due to a single blemish on their credit history.
Alternative lenders have streamlined the approval process and are using technology to find outside-the-box ways to evaluate the creditworthiness of applicants. One company is even reviewing applicant’s social media activity as a determining factor. Small business owners are getting answers in minutes and hours instead of days and weeks.
These are just a few of the ways small business lending is getting the makeover it desperately needs. Banks will continue to be a fantastic option for small business owners seeking funding – but it’s good to know that it’s not the only one.