Alternative lenders attracting a considerable number of small-business borrowers

Since the years immediately following the Great Recession, the lending space in the U.S. has grown considerably more diverse than its original division between banks and institutional lenders. This is most readily reflected in the emergence of alternative lending providers. 

"Alternative lending has grown in popularity in recent years - not unlike alternative credit."

While these providers of financing don't currently occupy the same position of prominence they assumed when they had just arrived and looked like the latest big thing, notable evidence exists to suggest alternative lenders still constitute a notable draw. A study by the Mercator Advisory Group stood out as one of the latest examples positing the impact of alternative and web-based loan firms. Here, we'll examine its findings and what their implications may be for the popularity of alternative credit, which, to a certain extent, grew in popularity alongside nonconventional lending.

SMBs putting trust in alternative financing 
According to the findings by Mercator Advisory's researchers within its 2017 U.S. Small Business Payments and Banking Survey, 27 percent of small businesses in America have turned to alternative lenders at some point in the recent past. The primary reason for patronizing these providers was a faster response time and urgent need for capital.

Karen Augustine, author of the report and senior manager of primary data services at Mercator, elaborated on this in a statement accompanying the data. 

"Small businesses need loans to run their businesses as they are often constrained by cash flow management challenges," Augustine said. "They need access to credit wherever they can get it and will look outside ... their banks for it. They are more likely to borrow on credit cards and use personal accounts, and they often need to delay routine purchases due to cash-flow constraints. Ease of loan application and faster funding are of critical importance." 

Though it was not touched upon in Augustine's report, the willingness of alternative lenders to eschew traditional credit scoring when making loan-approval decisions stood out as one of these financing providers' initially attractive value propositions. According to NerdWallet, many remain willing to embrace loan applications who may have imperfect credit history, as could easily be the case with a small-business owner, and could accept alternative credit data instead.

Rate of approval still high despite recent decline 
According to the Biz2Credit Small Business Lending Index for January 2018, the loan approval percentage rate for alternative lenders experienced a slight decline, falling to 56.6 percent. This figure has been dropping for the past two years, but as the approval figure back in early 2016 was through the roof, it has not yet majorly impacted alternative lenders' standing. Rohit Arora of Biz2Credit confirmed their viability for SMB owners.

"Alternative lenders remain a source of funding for businesses that need money quickly or that have less-than-stellar credit histories," Arora said. "With an economy ripe for entrepreneurship, borrowers at various levels of creditworthiness continue to apply for credit. Often, companies that cannot find funding from banks are able to secure financing from [nonbank] lenders."

With the U.S. economy at large in a place of relative stability after a near-decade of uncertainty, the time is ripe for small businesses - or prospective entrepreneurs - to take a chance. Those with concerns about their credit rating may benefit from joining PRBC to assess their credit using data more relevant to our everyday lives. Contact us to learn more!

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