alternative lenders

How Alternative Lenders Fill the Gap in Small Business Loans

By Jessica Harris

Small business owners often need access to working capital in order to maintain cash flow, make payroll, purchase equipment, invest in new opportunities and manage their overall business operations to thrive and grow. However, in recent years, it has become more complicated and challenging for many business owners to get access to small business loans from traditional banks.

In several key ways, small business lending has not yet recovered from the Great Recession. According to data from the Federal Reserve Bank of Cleveland, as of 2014, small business loans in loan amounts under $1 million were still at levels 17 percent below their pre-recession peak. Many small business owners typically want to borrow relatively small amounts to suit the goals of their businesses – but banks are often interested only in lending bigger amounts, which are more profitable for the banks to issue.

As a result, there is a big gap forming between the needs of small business owners who want to borrow money, and the larger loan amounts that banks are more eager to provide. Fortunately, there are new opportunities for small business owners to get access to the working capital that they need. A variety of non-bank lenders, also known as “alternative lenders,” are starting to offer new options for small business loans.

Here are a few examples of how alternative lenders operate, and why it matters to small business owners.

Alternative Lenders are Growing

According to CNBC, the size of the U.S. non-bank financial system is now $3.2 trillion, and growing. Small business owners tend to be especially interested in nonbank lenders because they can get access to capital without the delays and limitations of a traditional bank loan process. The CNBC article cited data which found that small businesses with $5 million or less in revenue were significantly more likely to use online marketplace lenders (a type of alternative lender) than businesses with $5 million to $100 million in revenue.

Alternative Lenders are More Innovative

New online technologies make it more possible than ever before for small business owners to connect with options for working capital. Alternative lenders offer streamlined online loan application processes, online crowdsourcing of funds and various other features that are relevant to small business owners who do business online.

Alternative Lenders Offer the Right Size of Loans

According to data from a Harvard Business School working paper, some banks have reduced or eliminated loans below a range of $100,000 to $250,000 or have stopped lending to businesses that have revenues of less than $2 million. However, this loan amount is often exactly the “smaller” loan size that many small business owners need. Alternative lenders are filling a gap in the marketplace that has been left underserved by the banks. The online technologies utilized by alternative lenders have also helped cut the costs of issuing loans, which makes it more feasible to provide loans of a smaller size than is typically embraced by a traditional bank.

Even if your business is struggling to get approved for a loan by a traditional bank, there are a variety of alternative lenders that can help you get the working capital that you need. Alternative lenders are opening up new possibilities for small business lending by utilizing technological innovation, lowering costs and making the loan approval processes more efficient, even if it’s for loan amounts that big banks might not bother with. Banks will always have an important role in the economy, but for small business lending, they are no longer the only game in town.

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Jessica Harris
Jess Harris is Lead Writer at Kabbage, a platform lender that issues small business loans by providing working capital online. Kabbage has funded more than $1 billion to help businesses grow.

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