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The impact of alternative financial services

Jun 12, 2013 Sean Albert

Since the economic downturn roughly five years ago, the alternative financial services industry has experienced massive growth. Firms that operate in this sector have been bolstered by a confluence of factors, including increased distrust in the nation's biggest lenders, as well as better technology to handle risk management and strengthen loan approval ratings.

When it comes to small business lending, alternative financial services companies have in many ways kept the economy above water. Between short term financing, crowdfunding, angel investors and a variety of other alternatives to traditional bank loans, small business owners have been able to acquire the financing necessary to either start new companies or expand upon existing operations.

The state of lending
Businessweek recently reported that the years following the financial crisis were tough ones for the average entrepreneur, with small business lending decreasing by nearly 20 percent. What's more, commercial lending also dropped significantly in between 2007 and 2010, though not nearly as badly as small business loan disbursement volumes.

According to the news provider, larger banks often take long periods of time to approve a loan for a small business, especially as these institutions tend to have more traditional risk management processes. When in desperate need of working capital to pay off debts or make necessary purchases, an entrepreneur does not typically have the time to wait on this approval process.

The source explained that alternative financial service providers use advanced technology to maintain strong risk management decision-making while still expediting the loan approval process. This is also the reason why approval ratings are so much higher among alternative lenders than traditional financial institutions.

For example, the April Biz2Credit Small Business Lending Index revealed that alternative institutions have maintained approval ratings above 60 percent for more than a year, hovering around 64 percent in the past 12 months. Big banks, on the other hand, have seen improvements in approval ratings, though only from 10.6 percent in April 2012 to 16.8 percent two months ago.

Taking all options into consideration
Small business owners have a wider variety of sources to tap for loans than ever before, and the only mistake is not looking at all possibilities before signing a deal. Each specific reason for acquiring the loan will demand different terms, and sometimes entrepreneurs can benefit most from applying with an alternative finance firm.

This approach will most often help small businesses make the most savvy decisions when it comes to loan acquisitions.