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Alternative lending provides fast-tracked funding

Jul 07, 2015 Sean Albert

Dealing with traditional lenders, like banks, can be a hassle due to the requirements, restrictions and timelines associated with securing a loan. Because of these drawbacks, many businesses and consumers seeking immediate funding have found the process of working with alternative lenders to be more amenable.

Banks are being replaced by more favorable newcomers


The American Enterprise Institute compiled a report that found that the share of lending that can be attributed to large banks has essentially been cut in half since 2012. Since then, alternative lenders have taken control of the market - as the bank share has dropped 28 points, from 61 percent to 33 percent, the alternative share has increased 27 points, from 24 percent to 51 percent.

These figures are indicative of a widespread leap from traditional lending companies to third-party companies that specialize in loan distribution. The source said that a primary reason for this shift is the relative ease of borrowing from an alternative lender, including less strict requirements and a significantly quicker time of response.

Forbes contributor Nicole Narea detailed a real-life example of this scenario unfolding: Marty Mares, a long-time owner of two McDonald's franchises in Colorado decided to open a new Einstein Bros Bagels location in San Diego. He needed a loan of $500,000 to complete the move, which he sought out via several different banks and then the Small Business Administration. However, since the application process was lengthy and had a long list of requirements, including ultimate approval from a traditional bank, Mares instead turned to a new startup lending company.

ApplePie Capital, the alternative lender, charged Mares a slightly higher interest rate, but it offered a response in 30 days, which the SBA and the banks had not indicated would be the case had he decided to borrow through them. Despite making a higher monthly payment, Mares found that going through the alternative source was a superior option, given the timely nature of the transaction.

The financial collapse leads to a steady decline in bank loans
Narea also interviewed Pete Sorensen, director of international business development and integrated marketing for the Franchise Brokers Association. Sorensen noted that the trend toward alternative financing can be traced directly back to the housing crisis, and subsequent economic recession. He suggested that investors at that time were on the lookout for ways to diversify their offerings, and alternative lending was a means to achieve that goal. Ever since, franchises and business owners have turned to nontraditional sources for loans in increasing numbers.

The AEI study noted that this trend has continued in 2015, as banks experienced another share drop of 1.2 percent in February alone. This rapid transition away from traditional lenders has culminated in a new borrowing climate that is seemingly more encouraging to potential entrepreneurs, given the newfound access to immediate funding that was not achievable in past decades.

Banks are beginning to fade out of the lending picture due to the rise of alternative sources, and this development is good news for loan-seeking businesses.