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Alternative lending continues to drive business health

Oct 01, 2013 Sean Albert

Economists and analysts have largely agreed that alternative financial services helped strengthen small business health during the harshest years of the recession, as traditional channels of lending dropped substantially. Entrepreneurs have made it through some of the toughest years in decades, and are now enjoying greater access to small business loans than any time since before the financial crisis.

Now, despite the return of larger banks and smaller financial institutions to the lending game, alternative lending remains one of the more popular options for entrepreneurial financing. Alternative lending has expanded in a relatively short period of time, with various types of products continuing to proliferate rapidly.

Small business owners need to ensure that they are looking at all of the choices available when deciding upon a loan product, as there is now a more diverse universe of options in the form of alternative financial services.

Which trends are stronger?
Crain's Cleveland recently reported that new data might indicate small business owners do not necessarily need traditional financial institutions anymore, especially given the much higher approval rates recorded among alternative lenders. Though some segments of the post-recession economy are still in the works, and subsequently difficult to measure, it seems as though financial institutions are not garnering the same following today as they did roughly one decade ago.

Despite the higher rates among alternative lending products, analysts believe that these options are more preferable because of the speed and ease with which entrepreneurs can access the necessary financing. According to the news provider, such lenders have picked up the slack that was left from the "too big to fail" debacle, when small business credit experienced one of the largest crunches in recorded history.

The source cited data from the Federal Deposit Insurance Corporation that indicated small business loans fell 12 percent from $327 billion in 2008 to $289 billion this past June. Outstanding loans are often a major measurement of small business health, especially credit that is still in good standing from a collection perspective.

On the other hand, Crain's Cleveland noted that one alternative lending institution experienced growth from $5 billion in small business loans before the recession to $50 billion today. Data like this signifies which trends in small business lending are more resilient to change, with alternative lenders continuing to adapt and capitalize on the new preferences of modern entrepreneurs.

Smaller loans in the spotlight
One of the emerging themes in small business lending is the rise of loans that are taken out in much smaller amounts, known as micro loans. Small business owners have seemed to be especially interested in these products since the recession, as they are often for amounts around $100,000, are low risk and quick to be disbursed.

However, many of the nation's traditional lending institutions do not offer such products, as they would not see much of a profit from disbursing these small numbers. This is yet another reason why alternative lending has become so popular, as firms in the industry are more willing to disburse smaller lines of credit.