Oct 30, 2013 Sean Albert
During the economic recession, the alternative financial services market experienced massive growth amid tightened lending terms among traditional banks and credit unions. In the years that have followed, alternative lenders have continued to carve out a niche area of the financing market, and have been especially active in the small business sector.
Because these lenders generally have looser terms, higher approval ratings and quicker disbursement times following the initial application, they have been a much-needed companion to entrepreneurs across the nation. Small business owners in need of financing should always consider all of their options, including alternative channels, before making a final decision.
A growing wave
Forbes recently listed several catalysts that led to the exponential growth of alternative lending in the past five years, including the Great Recession, which left a massive void in the small business sector. Following several years of the government working to offer traditional financial institutions incentives for lending to smaller businesses and these organizations asserting that there was simply no demand for such products, alternative lenders gained a firmer stature in the market.
According to the news provider, innovations have been the true drivers of alternative lending growth in the modern marketplace, especially considering the widespread effort to reach small business owners among traditional financial services providers. Alternative lenders have long used new tools and data management strategies to provide entrepreneurs with quicker turnarounds on applications and higher chances of approval.
What's more, the source stated that traditional banks are falling far behind the curve because of an apparent lack of desire to use new technology. As a result, alternative financial services providers are excelling in the market, diversifying lending options and making it much more difficult for traditional banks to compete in this increasingly fast-paced environment.
For example, the author of the Forbes article pointed to research that indicated traditional lenders use committees to underwrite loans and generally have 30 to 60 day approval timelines. On the other hand, alternative lenders use advanced technology to underwrite the loans, and are capable of offering customers customized and diverse options with 24 to 48 hour approval timelines.
The magazine noted that certain trends seem to indicate that traditional banks will eventually be antiquated in the small business market. Should credit unions, small banks and larger financial institutions continue to fall behind in operational processes and small business targeting, this prediction will likely manifest into reality.
Why go alternative?
The reasons behind alternative lending's initial growth spurt during the recession was an increased need for timely delivery of loans among businesses of all sizes. Traditional financial institutions and other lending channels commonly tend to view small businesses as high risk and low reward. This poses a significant threat to economic health in the Untied States considering the level of involvement entrepreneurs have in gross domestic product and the employment picture.
Small business owners can gain a wider range of options when it comes to lending by looking into the alternative financial services market.