How Alternative Lenders Bridge the Small Business Financing Divide

Small business owners often need funds to keep things running smoothly—think cash flow, payroll, buying equipment, investing in new opportunities, and general business management. Unfortunately, getting small business loans from traditional banks has become tougher in recent years.

Since the Great Recession, small business lending hasn’t bounced back completely. Data from the Federal Reserve Bank of Cleveland showed that by 2014, small business loans under $1 million were still 17 percent below their peak before the recession. Small business owners usually want to borrow smaller amounts that fit their needs, but banks prefer issuing larger, more profitable loans.

This disparity has created a gap between what small business owners need and what banks are willing to lend. Luckily, there are now new ways for small business owners to secure the capital they need. Non-bank lenders, also known as “alternative lenders,” are stepping up to offer various loan options.

According to CNBC, the non-bank financial system in the U.S. is now worth $3.2 trillion and growing. Small business owners are drawn to these lenders because they can get funds faster and without the hassles of traditional bank procedures. Data cited by CNBC indicates that small businesses with $5 million or less in revenue are more likely to use online marketplace lenders than larger businesses with revenues between $5 million and $100 million.

Thanks to online technologies, it’s easier than ever for small business owners to find working capital. Alternative lenders provide streamlined online loan applications, crowdfunding options, and other digital features that are useful for business owners operating online.

A Harvard Business School working paper found that some banks have either cut back or stopped offering loans below $100,000 to $250,000 or to businesses with less than $2 million in revenue. But these smaller loans are often exactly what small business owners need. Alternative lenders are bridging this gap, offering smaller loans that banks have overlooked, and using online technologies to reduce costs, making it feasible to provide these smaller loans.