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Several factors driving alternative lending popularity

Mar 08, 2013 Sean Albert

In the years following the Great Recession, a variety of economic segments have transformed substantially, especially corporate lending. The financial crisis stimulated the tightening of credit from traditional lending avenues, especially big banks, and as such led to exponential growth in the alternative financial services market.

Small business owners as well as executives in major enterprises have increasingly turned to alternative lenders to acquire the credit they need to either start or expand their companies. Though traditional loan disbursement volumes have seemed to rebound in the past two years, businesses are still using alternative avenues for corporate loans and financing.

Now, several discussions in Washington seem to have the alternative lending sector buzzing, as decisions might lead to even more growth among these agencies. Business owners should always assess a variety of lending products prior to making a decision, as alternative avenues may be more advantageous than traditional bank loans, depending on the needs and specifications of the company.

Major decision might fuel alternative finance
CFO recently reported that the ongoing sequestration decision in Washington might end up driving growth in the alternative lending sector, especially when it comes to small businesses. The sequestration is expected to occur, and will mandate more than $80 billion in federal spending cuts that will effect a variety of government programs and initiatives.

According to the news provider, this decision will likely negatively impact the access of credit for small business owners, while these same firms are expected to have an increased need for working capital. Perhaps the most important component of the sequestration is that it would cut federal loan guarantees from the U.S. Small Business Administration by more than $900 million.

The source explained that SBA loans have been crucial in the economic recovery, as the administration backed record lending volumes in 2011 and 2012. Research indicates that the gap between accounts receivable and payable has continued to grow between the beginning of 2012 and the first months of the new year.

CFO asserted that though banks do prefer to lend to small business owners, credit scores and other factors will become bigger impediments when the sequestration decision is put into effect.

"Bankers are incented on the profitability of their loan portfolio," James Walter, co-founder of a software company that automates borrowing calculations. "The time a banker has to spend underwriting a small loan eats into that profitability. Banks love small-business loans because they renew annually; the banker touches it once a year; the bank gets a customer's checking account, a credit card - they love these accounts. They're just completely inept at doing them."

The source added that small businesses, as well as larger enterprises, will need to have adequate working capital and access to additional credit to help bring the economy completely out of the recession. Small businesses are responsible for the majority of new employment opportunities, as well as almost half of total gross domestic product, and as such need to have the funding necessary to expand for a better national financial situation.

Alternative lending avenues
Real Business recently listed several alternative financial services that executives should consider when looking to acquire more credit. According to the news provider, venture capital and private equity are often strong choices for entrepreneurs, while angel investors have become more common throughout the past several years. Additionally, invoice financing and crowd funding remain two of the fastest growing markets for corporate lending today.

All business owners should always assess each lending opportunity to ensure that decisions are made in an efficient and effective fashion. By considering all of the options and carrying out due diligence with each, companies can obtain the credit they need to grow despite tightening bank credit availability.