Alternative lending is a diverse set of financial solutions available to small business owners, stepping in when traditional banks fail to meet their funding needs or reject loan applications. This modern approach, often facilitated by technology, caters to underserved markets. In a climate marked by high inflation, alternative lending is gaining popularity among Americans.
Alternative Lending vs. Traditional Lending
The fundamental difference between alternative lenders and traditional financial institutions lies in the source of funds. While banks and credit unions have traditionally been the providers, alternative lending allows small business owners to secure financing directly from investors.
What makes alternative lending attractive is its speed and flexibility in approving business loans when compared to traditional lenders. Investors also favor this method due to the efficiency and accuracy of tech-enabled tools used to assess credit risk and set loan terms.
How Does Alternative Lending Work?
Many alternative lenders operate in the digital realm, utilizing online platforms or mobile apps for their underwriting processes. These lenders often cater to specific niches or industries, each employing unique algorithms to evaluate debt risk and determine interest rates.
The lending platform connects small business owners with potential investors, who can then choose to approve and provide the necessary funds. Some alternative lending platforms partner with banks to bridge the funding gap, even though they are not considered traditional bank lenders.
The Benefits of Alternative Lending
When deciding between traditional banks and alternative lenders, the choice largely depends on your unique circumstances. However, there are several key advantages to opting for alternative lending:
- Easy Application Process: Applying for a loan through an alternative lender is hassle-free.
- Quick Approval: Approval processes are faster than those of traditional lenders.
- Flexible Terms: Business loan terms are more adaptable to your specific needs.
- High Approval Rate: Alternative lending boasts a high approval rate.
For small business owners struggling with cash flow or needing capital for technology upgrades, alternative lending can offer working capital loans to cover everyday expenses or short-term business loans for technology investments, reinvigorating growth prospects.
Benefits for Small Business Owners
Alternative lending serves as a lifeline for small business owners, offering a faster, more streamlined approval process compared to traditional options.
Benefits for Lenders
Alternative lending is a boon to underserved markets, including small businesses, especially those owned by women and minorities. It presents unique investment opportunities for private lenders and corporate investors, featuring attractive yields, short durations, resilient lending programs, and diversification. This diversification is particularly valuable in the face of ongoing inflationary pressures.
The Alternative Lending Market
Technology has revolutionized the financial industry, leading to a fusion of finance and technology. An increasing number of consumers believe that non-traditional lenders are better suited to address their unique financial needs, as stated in Oracle’s Digital Demand survey.
As the nation recovers from the pandemic, there’s a growing demand for non-government financial assistance, especially among small businesses. Big banks have historically underserved this segment, with a $5 trillion gap reported in 2018 between the funding needs of small and medium-sized businesses and the opportunities provided by traditional lending.
Alternative lenders have identified these unmet needs, leading to the emergence of a diverse ecosystem of alternative lending options in recent years. Here are some notable categories:
- Direct Lending: This approach eliminates financial institutions as intermediaries, reducing red tape and growing by 28.3% over the past three years.
- Venture Debt: A viable alternative to venture capital, offering businesses greater control over their capital and witnessing year-over-year growth of almost 30%.
- Structured Equity Products: Providing flexibility to fuel small business growth, these products are rapidly approaching the $7 trillion mark.
- Debt Financing: Frequently used for debt consolidation, this type of alternative lending helps small businesses manage their finances more effectively, enhancing stability.
Alternative lending is now a formidable competitor to traditional banking. Initially conceived as a tech-driven solution to bridge a $5 billion funding gap, it is now on the verge of reshaping the conventional lending landscape.
These alternative lenders expedite funding for small business owners, who might otherwise struggle to secure crucial loans. For investors, alternative lending offers an appealing combination of yield and duration, proving its resilience even in turbulent economic times.