what-is-alternative-lending

06 Jul Why Small Business Owners Should Seek Alternative Lending

Alternative lending is a set of loan options available to small business owners when traditional banks do not provide adequate funding or deny a loan application. Alternative lenders are increasingly growing in popularity as Americans navigate through a period of high inflation. 

Alternative lending is often a tech-enabled solution that provides funding to underserved markets. 

 

Alternative Lending vs. Traditional Lending 

At its most basic level, the difference between alternative lenders and traditional lenders is who is fronting the cash. Traditionally, a financial institution like a bank or credit union provides the funds. However, with alternative lending, small business owners receive funds directly from an investor(s). 

Alternative lending is quickly growing in popularity because approval is faster and business loan terms are more flexible than traditional lenders. Alternative lenders also benefit investors because they appreciate the speed and accuracy of tech-enablement when determining credit risk and loan pricing. 

  

How Does Alternative Lending Work? 

Many alternative lenders are tech-based, which means that the underwriting process is on a digital platform that is accessed via a website or app. Alternative lenders are niche because they provide specific services and some specialize in specific industries. Each alternative lending platform also uses a unique algorithm to assess debt risk and assign appropriate rates. 

The lender on the other side of the platform can choose to approve the business loan and provide the cash funds. 

In this case, the platform manages the customer relationship with the small business owner while the investor chooses which loans to finance. Other alternative lending platforms use partner banks to bridge the funding gap but are considered non-bank lending options because they are facilitated through an alternative lending platform. 

 

The Benefits of Alternative Lending 

Whether you choose to apply for a small business loan through a bank or an alternative lender is dependent on your unique situation. However, there are some key benefits when applying for a loan through an alternative lender. 

 

Key Benefits of Alternative Lending: 

– Easy Application Process 

– Quick Approval 

– Flexibility Terms 

– High Approval Rate 

Many small business owners are familiar with the stress of meeting payroll when cash flow is slow. Or the delicate balance between keeping a small business afloat and preparing for the future by financing the latest technology. Alternative lending can help with both by providing working capital loans for everyday expenses like payroll and short-term business loans to invest in new technology. 

For small business owners looking for the funding to develop an app or update their workflows with tech-enablement, a business loan through an alternative lender could be the catalyst for renewed growth. 

  

Benefits for Small Business Owners 

When it comes to receiving the funding you need to keep your small business in operation, alternative lending is there. Overall, it’s easier, faster, and more likely to receive approval through an alternative lending platform. 

  

Benefits for Lenders 

Alternative lending helps underserved markets like small businesses, especially woman- and minority-owned businesses, that require working capital or want to scale their service offering. It’s also presenting unique investment opportunities on the other side for private lenders. Private alternative lenders and an increasing number of corporate investors are drawn to alternative lending because of its attractive yield and short duration, resilient lending programs, and diversification.   

With alternative lending, investors are receiving the most diversification possible. Instead of putting each egg in a different basket, they are putting fractions of eggs in many different baskets and creating resilience because of it. That resiliency is great news as inflation continues to put pressure on small business owners. 

  

The Alternative Lending Market 

Technology is touching every facet of the business world, especially the finance industry. The convenience and security of receiving cash fast online is driving the increasing convergence of finance and tech. According to Oracle’s Digital Demand survey, 40% of consumers surveyed believe that non-traditional lenders can better assist them with their niche financial needs. 

FinTech’s capabilities are exploding with possibilities, especially when there is no shortage of businesses that require non-government financial assistance as the country recovers from the pandemic.   

Small businesses have long been underserved by the big banks. In 2018, SME Finance Forum reported that there was a gap of $5 trillion between the funding needs of small and medium-sized businesses and the opportunities available through traditional lending. 

Alternative lenders took notice of the unmet needs of small business owners and an ecosystem of alternative lenders has emerged over the past few years as a result: 

 

Direct Lending 

Direct lending cuts out the financial institution as the middleman and subsequently gets rid of the red tape involved with traditional lending. Direct lending has grown by 28.3% over the past three years, with projections of continued growth as this option becomes more mainstream. 

 

Venture Debt 

Venture debt is an alternative to venture capital that helps businesses stay in control of their capital while leveraging new opportunities. The venture debt market has shown a year-over-year growth of almost 30%, staying in line with other types of alternative lending. 

  

Structured Equity Products 

Structured equity products are a flexible funding option designed to help small businesses generate growth. Technology and innovation continue to fuel the growth of structured equity products towards the $7 trillion mark. 

  

Debt Financing 

Most commonly used to consolidate debt, this type of alternative lending can help small businesses gain control over their finances for improved stability. 

Alternative lending is an emerging competitor to the big banks. What first emerged a few years ago as a tech-enabled solution to meet the needs of a $5 billion funding gap is threatening to upend and transform traditional lending. 

Alternative lenders provide funding faster to small business owners that otherwise may not be able to obtain a much-needed loan. For investors, it offers a favorable combination of yield and duration that is proven to be resilient in tumultuous economic times. 

Apply online today for a small business loan through QuickBridge and receive cash funds in your account in as little as one business day. Learn more about our financing options that put you in control. 

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