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Making Sense of the Shifting Small Business Lending Market

AUTHOR: Kevin Jaskolka

The small business lending world has changed. Community banks are still a prime destination for many small businesses, but the mid-sized regional banks that have long served the industry have largely been consolidated into larger, national entities or moved away from small business lending due to the small scale and inherent risk of those loans.

While these opportunities can make it more difficult to get a traditional small business loan, online, alternative lenders have emerged in the marketplace, filling a critical gap for small businesses trying to get funding while keeping debt under control.

The Limitations of Traditional Lending Models

A traditional bank uses credit scoring, bank transaction data and similar information to evaluate a company's readiness for a loan. For the most part, they are heavily reliant on deep, manual analysis of this data to assess loan applications, develop a funding strategy for the loan and come up with terms.

This means that processing a loan can be expensive for a typical community bank. The labor involved is significant, so the profitability of the loan has to be significant enough to justify that cost. If your business presents a certain amount of risk, the bank will generally be unwilling to deal with the costs of the loan. Even programs like Small Business Administration loans don't eliminate this problem, they simply ease it by reducing risk on banks.

This situation pushes banks to be highly selective in small business lending. It's great if you need a major, large-scale loan, because you know the bank will be there to support you because they have such a high stake in the loan. But many small businesses owners need smaller loans to improve cash flow, buy equipment or launch a new service. This is where alternative lenders step in.

How Alternative Lenders Change the Situation

Alternative lenders use a wider range of data sources, many of which they source from industry databases, to help them assess your business' ability to handle a loan. This analysis helps them automatically gather relevant information to inform their decision-making process, reducing the time and labor that goes into handling a loan application.

To further disrupt traditional lending processes, most alternative lenders focus on small-scale, short-term loans. This further reduces the risk on the lender and borrower alike, as the amount of money handled in a loan arrangement tends to be much smaller and more manageable.

The end result is a completely different lending situation in which loans can be processed entirely online in just a few days - often as little as 24 hours. From there, the lender can establish a repayment scheme that aligns with your cash flow needs - for example, we often find small, automatic daily payments to be easy for clients to deal with. The automated nature of the transaction alleviates worry about missing a payment or needing to manage the loan. At the same time, daily payments keep the cash flow disruption to a minimum, making it easier to handle the debt.

These dynamics create a new paradigm around getting funds. With traditional banks, you may get one loan that you pay back over years. That funding is helpful, but the ongoing debt may limit your access to credit down the line. With alternative lenders, you get working capital that you pay off often in less than a year, making consistent borrowing an option as you work to grow your business.

Rethinking Small Business Borrowing in the Alternative Lending Age

With frequent, small loans as an option for businesses, you can take a different approach. Accessing working capital in the form of a short-term financing can be a regular practice. You can use this too:

  • Fund a new project that your customer is ready to undertake, but you don't have capital in advance for inventory or special equipment.
  • Instead of waiting to grow your business and potentially missing opportunities, you can keep pace with the market.
  • Take a creative approach to cash flow management. By doing so, you can treat capital as more of an asset to invest in your business, as small infusions are readily available.
  • Get the capital you need without having to provide collateral and, sometimes, even if you don't have great credit.

Alternative lenders are turning small business loans into a relationship-driven service business. Instead of getting one loan over the course of years, Lenders like Select Funding build an ongoing relationship with you. You can keep coming back for working capital and equipment financing as you need it, and you'll be working with a company that already knows your business and is comfortable working with you. The result is a situation in which you can borrow money with more confidence, ensuring you always have the capital you need to grow your business.

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