A trend that began in the recession of 2008 and 2009 continues to influence where companies apply for – and ultimately get – small business loans. During a time when business owners needed money to push through the economic dip, banks were also facing difficulties and became increasingly reluctant to lend to anyone without stellar financial standing.
Enter small business alternative financing.
Lenders offering the promise of easier applications, higher acceptance rates and shorter wait times quickly stole market share from banks. In turn, they left the institutions with only 40% of the market for small business loans, instead of the 77% they held pre-recession. Startups began turning to alternative lenders, too, and the industry has been evolving ever since.
Since alternative lenders started snapping up market share, banks are making efforts to draw small business owners back.
Some are increasing the level of risk they’ll accept or focusing on specialty markets. These changes may explain statistics showing small business owners are becoming less frustrated with banks. Regardless, there are still significant barriers to qualification.
This is due in part to the challenges banks face when considering small business loans. Underwriting costs are higher for these institutions than for alternative lenders, making it difficult to profit from lending small amounts. Lending to high-risk businesses may increase the likelihood of defaulting, which can lead to potentially substantial losses or legal complications.
While banks try to work out these kinks, new players are making strides in the fintech small business lending market.
In 2018, National Business Capital & Services broke $1 billion in small business financing.
It’s not just business owners who see the value of alternative banking and funding options.
According to a Digital Demand in Retail Banking survey conducted by Oracle, over 40% of consumers think “nonbanks can better assist them” with financial tasks like managing money and investing. In commerce, the growing movement toward mobile payments through e-wallets and peer-to-peer (P2P) apps indicates both consumers and business owners want quicker, more convenient digital options to send and receive money.
About one-third of small business owners looking for financing chose online lenders in 2018, up from 24% in 2017. Many also applied for bank loans in 2017; about 48% of applications went to large banks and 47% to small banks. Statistics on approval ratings for these applications vary.
According to Forbes, approvals for small business loans at big banks hit 27.3% in early 2019, whereas FED Small Business showed these banks had approval rates of 56%. Small bank approvals may be even higher, around 68%, but online lenders appear to approve an average of 75% of applications.
This may be one of the reasons why research from PwC showed over 50% of senior retail banking executives see alternative business funding as a threat.
As of 2017, alternative lenders represented the biggest business financing competitor to banks. Such high approval ratings are possible thanks to the detailed data these lenders can collect and analyze using a combination of algorithms, artificial intelligence and machine learning to better determine applicants’ creditworthiness.
To keep up, banks must learn to streamline and update their technologies to support faster underwriting processes. Some banks have already begun to partner with providers of alternative business funding solutions, sending business owners unable to meet bank loan criteria to these companies for financing.
Both banks and fintech lenders benefit from these collaborations, which also allow small business owners to quickly connect with reliable funding sources through traditional channels in their own communities.
In 2018, the SME Finance Forum found there was a $5 trillion funding gap between what small businesses need and the amount of funding available from lending institutions.
Top alternative lending companies are stepping in to fill this gap, and business owners are taking advantage of the benefits. Nonbank lenders can offer:
Although small business owners tend to be more satisfied with the application process at small banks than online lenders’ applications, the perks of efficient underwriting and fast delivery of funds continue to give banks a literal run for their money.
By focusing on innovation and adapting technology to provide better service, alternative lenders work to give business owners more opportunities than banks can currently offer.
Using technology to analyze numerous financial details lowers the risk alternative lenders face when extending funding to the businesses banks tend to reject.
More detail means a better understanding of creditworthiness, which allows fintech lenders to offer financing to underserved markets and small business owners who would otherwise fall through the cracks.
Paying attention to multiple markers of financial health allows top alternative lenders to offer funding to businesses turned down or overlooked by banks. As a result, business owners get the loans they need to cover gaps in cash flow, improve customer service or expand into new markets.
National Business Capital & Services recognizes the necessity of better sources of small business financing and offers a variety of choices for startups and established companies.
With flexible terms and rates based on more than just a FICO score, loans from National offer business owners viable options when banks say no. Bad credit isn’t a barrier, and funding can be delivered in as little as one day in some cases. If you’re ready to give alternative lending a try, contact National to discover which loan is right for you.
National Business Capital & Services is the #1 FinTech marketplace offering small business loans and services. Harnessing the power of smart technology and even smarter people, we’ve streamlined the approval process to secure over $1 billion in financing for small business owners to date.
Our expert Business Financing Advisors work within our 75+ Lender Marketplace in real time to give you easy access to the best low-interest SBA loans, short and long-term loans and business lines of credit, as well as a full suite of revenue-driving business services.
We strengthen local communities one small business loan at a time. For every deal we fund, we donate 10 meals to Feeding America!