For many small business owners in America, the pandemic has dealt a severe blow. The ways in which they could conduct their business have changed, from going digital during the lockdown to forced reconfiguration of their day-to-day operations. Some, unfortunately, had to close completely. What is perhaps a lesser-known, though more optimistic, statistic to come out of last year is that the number of small business apps has hit an all-time high. It was a 95% increase compared to 2019. With an apparent increase in startups and small businesses, the demand for working capital is increasing, along with an appetite for alternative finance.
Banks vs Alternative Commercial Lenders
It’s no secret that traditional banking institutions have strict lending criteria and usually take a long time to provide funding. It is also well known that about 80% of small business loans are rejected by banks, and that just one application could negatively impact your credit rating in the long term.
Non-bank lenders have been a viable source of obtaining working capital for small business owners. This is because lenders are more forgiving when it comes to creditworthiness, time spent in business, the industry in which their borrowers operate, etc. Plus, they’re usually much faster to fund, and the end-to-end application process can be completed online.
Each year, more small business owners and entrepreneurs are turning to alternative commercial lenders than traditional banks more than ever. âAlternative business loans are on the rise because traditional banks just aren’t lending to small business owners. There are no resources for them in terms of capital. This is where this secondary market comes in. Banks don’t want to take the risk for so little money, âexplained Jason Venturelli, founder of JSV Capital in New Jersey.
âThe only place we don’t compete is the interest rate. The banks are generally 8% or less, and we are in the 10% and more for the riskier files. We will go down to 5 percent for those with excellent credit scores. Aside from this competitive interest rate, we beat traditional banks in all categories of business loans. ”
When alternative loans are a good idea for businesses
Maybe a homeowner’s credit rating isn’t up to par, or their sales aren’t good enough. As a borrower, it can seem impossible to meet any bank’s standards. However, as a small business owner, you shouldn’t feel stuck in this. Alternative loans have several advantages over conventional banking institutions. The problem is, many borrowers don’t know about the alternative lending industry as a whole, aside from how and when they should best use it for their business.
Venturelli explained, âThe misconception is that alternative business loans are the Wild West. People think they have to go to a traditional bank. A traditional bank is a deposit institution. They do several things. Investments, 401K, IRA, savings and checking accounts. People don’t know that there are actually lending institutions where all they do is lend strictly to small businesses. “
They must stay afloat
Every business will need financing at some point, and unforeseen obstacles can arise at any time. Whether it’s a global pandemic, a seasonal drop in sales, or a breakdown of expensive equipment, alternative business loan options are more versatile and have faster turnaround times than business loans. traditional bank loans. Likewise, if a small business were to experience a crisis, instant access to financing could help keep their business afloat.
They want to grow or expand
Contrary to popular belief, business loans are not a last resort option for financing or only for those who need it most. In a good economy, business owners who have a steady stream of income can still qualify for alternative loans. That being said, future growth or expansion will be different for every business. One owner may need the extra money to hire new staff or increase inventory, while another may be planning to buy or build a new location.
They were refused by a bank
Maybe you work in a âriskyâ industry. Maybe your credit score has taken a hit, or you’ve only been up and running for six months. Each of these factors can result in a business owner’s refusal by a bank. When faced with a loan denial, there are options beyond traditional banking, such as alternative loans, which also have higher approval rates.
They need immediate capital
Banks can typically take 60 to 90 days to provide funding. If you need immediate financing, alternative lenders are faster to finance than conventional banking institutions. Thanks to the digitized processes implemented by many loan companies, borrowers have access to faster application and approval times. From the time they apply online until the time the funds are deposited into their account, it can take as little as 24-48 hours.
The future of alternative business loans
The pandemic – and rapidly changing market conditions – has led to the increase in alternative business lending across the country. Alternative lenders have succeeded in streamlining the lending process using technology, in addition to making it more inclusive. In 2021, the $ 300 billion industry is expected to generate even more interest, especially from startups and small business owners looking to make their first foray into alternative financing.