Traditional Lending Stays Quiet
Since the start of the recession in 2008, traditional avenues for small business lending, like banks, have essentially closed off to the Main Street business owner. While the Small Business Administration (SBA) still works to incentivize banks to lend to small businesses, they are still mostly limited to loans $100,000 and above. The Institute of Local Reliance conducted a study on small business lending over the last several years, and found that while loans for large businesses were hugely on the rise, small business loans and micro-business loans (loans under$150,000), were plummeting.
In 2013, the average SBA loan was about $360,000. Put that in contrast with the pre-recession average loan size of $175,000, and we can clearly see the drastic shift towards bigger businesses since the downturn. There are many forces at play here that influence this trend, including:
- The increased risk-averse nature of big banks since the 2008-2009 recession
- The attraction to larger, more lucrative business loans over small and micro-sized loans
- Small businesses becoming less creditworthy and more volatile due to the economic slump
- Additionally, the small and micro-business loans that were issued were largely originated by community banks and credit unions, not the big household names in banking. Unfortunately for small business owners, these types of financial institutions are disappearing under the weight of the regulatory burden of larger banks each day, and as these crucial hubs for small business lending close, traditional options for business owners may become even further out of reach.
The Rise of Alternative Lending
Luckily, the gap left by traditional banks have paved the way in the last several years for the growth of alternative lending – lending that is originated from a non-bank company. Alternative lending is now a multi-billion dollar industry in the U.S., and certain characteristics have risen that separate them from traditional methods. These include:
- Speed - Alternative Lending companies, through their relatively small sizes and focus on technology, are able to expedite the application and funding process to a couple of days, or even hours, instead of weeks or months.
- Customer Experience - Not only is the alternative lending process easier, it is less of a hassle – there is usually much less paperwork and documentation required for alternative lending than for bank loans.
- Underwriting - The way that alternative lenders score and underwrite small businesses are completely different from how banks do it, and alternative lenders often cater their criteria to work better for business owners.
- Flexibility - Alternative Lenders are smaller companies, and can be much more nimble than their big-bank counterparts, meaning they’re able to make decisions and accomodations much faster than a typical bank.
Alternative lenders, unlike banks, are typically formed solely with businesses in mind, and therefore can often be much more attentive and considerate of a small business owner’s needs. While banks are slow to loosen their reigns, alternative lending is quickly becoming not just a temporary bandage on the business capital market, but a permanent answer for business owners in 2014.
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