Aug 18, 2015 Sean Albert
Alternative lending is growing as a sector, due in large part to the accessibility that can be afforded to borrowers, as well as the increased flexibility of the overall process. Banks have traditionally had low approval rates for applicants, and when the Great Recession crippled the financial sector, the number of successful loan inquiries plummeted further.
This is where alternative lenders swooped in to capitalize on the potential for economic growth. When banks stopped distributing capital, investors began to realize that SMBs could help the economy rebound - but without supplemental funding, many entrepreneurs never got off the ground. As a result, peer to peer and online lending emerged as alternative sources of access to capital, and the impact on the economic climate has been significant.
Now that the financial industry has stabilized, banks are starting to offer funding again, but they still have extensive requirements. Here are several reasons, among many, why SMBs are turning to alternative lenders over traditional sources.
1. Banks weren't lending - someone had to fill the void
Caitlyn Bird of the Asheville Citizen-Times wrote that the most prominent - and most obvious - reason that entrepreneurs began to seek alternative lenders is that they were forced to. Banks were hindered by the financial crisis, and most could not justify giving out money in a time when revenue was debilitated. She spoke with Jason Curtis, the owner of a small furniture company in North Carolina, who attested that after countless loan rejections by banks, he found solace in the alternative lending sector. Curtis was quickly approved by a nontraditional source for the $25,000 he needed to invest in inventory for his growing organization.
2. More sources of access to capital increases chances for SMBs with poor credit
New York Post contributor Catherine Curon pointed out that many small business owners have poor or insubstantial credit histories - factors that might immediately preclude them from being approved by a bank. She spoke with New York-based entrepreneur Richard Cohn, who needed $250,000 to open his restaurant on time. After analyzing his situation and determining that traditional lending would not suit him due to the tedious and tiresome process, his business' small initial profit margins and the lack of flexibility that banks offer in terms of timeliness, Cohn was able to find a lender that could meet all his needs. He opened his restaurant on time, and calculates that his investment will be worthwhile within a few short years.
3. Traditional lenders do not meet the evolving needs of borrowers
Both writers came to the same conclusion: Banks simply cannot meet the needs of entrepreneurs in 2015. SMBs often need short term loans for relatively small sums, simply to maintain daily operations or make payments while waiting for expected income. Many small business have sporadic profits, as their clients often pay larger lump sums on a less frequent basis. The process of applying for a loan from a bank is more time-consuming, restrictive and generally cannot address day-to-day requirements as sufficiently as alternative lenders can.