Special to California Business Journal.
When getting a loan, business owners often find it difficult to secure them from the SBA or even traditional lenders. Hence, more and more businesses are getting their loans from online lenders.
Businesses All Have Something in Common
What do all businesses, including small shops, restaurants, neighborhood auto shops, and ice cream stores have in common? They all cannot survive long enough if not for some financing every now and then.
Even if the business is already established, most small-scale entrepreneurs experience a significant cash flow lapse, which can jeopardize their capacity to replenish inventory, stock on some basic necessities, or pay for utilities. Payroll, rent, operating expenses or even a planned expansion can take a toll on the business operation if it is not funded well.
Small businesses and startups can have unpredictable cash flow fluctuation, which usually make them rely on business loans and credit cards. Moreover, SBA-backed loans are usually great in terms of interest rates, but they are a pain in the neck to apply for. Traditional lenders, on the other hand, have requirements that are almost impossible to meet, particularly for startups that do not have enough credit history to offer.
Small Business Lending: The Decline
During the 2008 financial crisis in the US, demand for traditional small business lenders have been come to a boost. However, small businesses usually find it really hard to get financing from them, mainly because many of the community lenders, which are the key financing source for small businesses, have shut down after the crisis.
Almost 20% of small entrepreneurs reported getting denied for credit, which are mainly due to lack of credentials and backup records. Furthermore, even if the business loans get approved, the owners usually do not receive the full loan amount they initially asked for. Last year alone, more than 50% of the business loans received a smaller amount than what they applied for.
One of the main reasons why businesses are getting denied of sufficient financing is their low credit scores, insufficient collateral, not enough credit history, excessive debt amount, and even low business performance.
The Best Alternative for Small Business Loans
For small entrepreneurs, being denied of a business loan can be a trying experience, especially if the funds are expected and much needed. Nonetheless, they can always try their luck in getting financing from alternative lenders, which luckily have been growing by the numbers in the past decade.
These alternative lenders are non-bank lending companies that typically operate online, offering small business owners and even regular individuals loan options minus the stringent requirements. Most of them do not even ask for a collateral.
The National Small Business Association stated that this type of lenders is a great contributing factor into why small businesses still have access to reliable funding.
The number of applications for small business loans online is increasing, but the increase in approval is also significantly positive. By 2025, the US market for these alternative or online small business loans is expected to reach $350 billion, given the number of applications and approvals that have been happening recently.
Alternative Lenders: Easier to Qualify?
Traditional business lenders require applicants to secure several financial documents, have a near-perfect credit score, and present a thoroughly done business plan. But what if you are just starting up?
Alternative lenders, on the other hand, do not always require financial documents and will also accept applications from those with not-so-good credit scores. One more great thing about them is that application process is usually done online, which makes it easier and faster.
That is why more than half the number of businesses with problematic credit profiles are looking for online lenders instead of a small bank or traditional lending company.
Of Course, Some Cons
It may be easier to get small business loans from alternative lenders, even if you do not have a stellar credit score. However, business owners should also consider the risks involved in dealing with online lenders. The disadvantages include higher fees and interest rates.
Many online lenders charge interest rates that are significantly higher compared to traditional lenders. For instance, credit unions and banks charge as low as 4% for their loans, while alternative lenders charge 7% and higher, sometimes even doubling the amount of your loan, depending on your credit score and risks involved.
Alternative loans are a lifesaver for a small business needing help in funding and cash supplementation. When getting these loans, always weigh the advantages and disadvantages or the cost-benefit ratio and see if it can be of help to your business or can become an additional burden.