Alternative loans will provide a lifeline for small businesses in a post-pandemic world
By Oz Konar
Even before the pandemic wreaked havoc on the economy, small business owners were increasingly moving away from banks when seeking financing. According to data published by Dun & Bradstreet in 2019, the number of companies trying to finance themselves is increasing. However, while fewer SMEs actively sought loans from a traditional bank, they also reported declining credit application success rates. Indeed, according to the SME Finance Forum, there is currently a funding gap worth $ 5,000 billion between what banks are willing to lend and demand from small and medium-sized businesses.
As we turn to a post-pandemic scenario, this trend seems unlikely to change. The economy has a long road to recovery, which means banks will be increasingly reluctant to extend credit to small businesses. The irony is that some of America’s biggest companies, from General Motors to CNN to Uber and Airbnb, have emerged during economically difficult times.
Therefore, rather than banks, the growing alternative lending industry is best positioned to provide a lifeline for the current generation of entrepreneurs seeking business financing.
What is the alternative loan?
Alternative loans have been around for centuries because people have always wanted reliable sources of credit that don’t involve banks. However, alternative finance as we know it today emerged from the digital switchover and accelerated in the aftermath of the 2008 global financial crisis. As small businesses found it more difficult to obtain financing from banks and As regulation increased capital costs for the banks themselves, other options became more popular.
Peer-to-peer lending platforms have paved the way for so-called “non-banks” that provide particular financial services, including mortgages, credit card transactions, and small business loans.
Now, alternative loans offer businesses a range of financing options. A lone entrepreneur who wants to start their own food truck or landscaping business will need an initial financial boost to purchase vehicles and equipment. Or, once they set up their initial business, they may want to expand the business with a few more trucks or fixed premises.
These are the kind of businesses that banks often refuse to lend to and which may be ideally suited for alternative lending.
How to access alternative loans
The best way to access alternative loans is through a business loan broker. While alternative loans offer many benefits beyond consulting your bank manager, doing your research, finding a reputable lender, studying the different options available, and agreeing on terms can always be time consuming. A broker can handle all of this effort. Plus, a broker has already established relationships with a wide variety of lenders, which means they can potentially find better terms for you than you would get by going to the open market on your own.
However, in addition to freeing up your bandwidth, a business loan broker offers a more valuable service than just saving you time and money. Alternative loan brokers also bring a wealth of knowledge and understanding regarding the loan markets and offer a more personalized approach.
Take into account that banks tend to look at small, fixed data points when evaluating loan applications, such as credit scores, cash flows, or guarantees. A broker will work with the borrower’s individual circumstances to determine the desired results. For example, a business owner may have a bad credit history, so a broker can put them in touch with businesses to help them improve their credit rating. A business owner might use some of their existing personal assets, such as real estate or retirement savings, as collateral, which banks wouldn’t always consider.
Business loan brokers work with businesses that specialize in start-up loans and can access specific types of lenders that are suitable for other lines of credit, such as borrowing equipment or premises. They can also help determine the best options between renting or buying and finding the best deal in between. It may also be that a business already has assets, which can be used as collateral to obtain credit in order to purchase other assets.
A more competitive credit environment
As alternative lending options become more available and banks become less willing to take risks on small businesses, entrepreneurs will increasingly simply bypass banks. Currently, the alternative finance industry is growth about 17% year over year, and business loans account for about 70%. Therefore, it seems inevitable that as more and more lenders enter the market, it becomes more competitive, to the benefit of entrepreneurs. With more options to choose from, brokers will offer a wider range of loan choices at the best rates available in the market.
Moreover, as alternative loans become more prevalent, they will no longer be an alternative but the norm. Eventually, banks may find they are missing out on a growing segment due to their reluctance to engage with small business owners.
Authors biography :
Oz Konar, founder of Business loan plan, built an eight-figure business in the business loan brokerage industry and helped thousands of ordinary people generate millions of dollars in income through their own businesses and gain financial literacy through his coaching programs . He has appeared in many important publications and has twice received the prestigious Two Comma Club award.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.