By Eyal Lifshitz of BlueVine
In the last 10 years, a wide array of new sources for small business financing has emerged. Alternative lending offers businesses the ability to untether themselves from banks. It is for this reason that non-bank entities are becoming an indispensable tool for small business owners.
(Photo courtesy of Eyal Lifshitz)
Since 2006, the alternative lending industry has more than tripled in size and is rapidly approaching $500 billion in managed assets, underscoring small business owners’ growing comfort and preference for these online services. Alternative lending comes in many forms, such as online term loans for established businesses with excellent credit, short-term loans that allow small business owners to borrow against revenue expected from future sales, online factoring that gives B2B businesses advances on their unpaid invoices, and merchant cash advances that provide a lump sum payment in exchange for a share of daily credit card sales.
Compared to the slow and tedious paper-based approach of banks, alternative lenders are gaining traction by holistically solving a small business’ financing needs: speed, ease and a higher chance of approval.
1. Alternative Lending Is Fast
Alternative lenders are structured fundamentally differently than a bank. You won’t find a branch to visit because virtually all these businesses service customers online. Using cloud-based software, these lenders are able to dramatically speed up the application process by removing paperwork from the equation.
Alternative lending also generally doesn’t fall victim to the bureaucracy that pervades traditional banks. Your application isn’t passed up the chain; instead, underwriters are supported by technology and algorithms to speed up the approval process. In addition, because they are oriented around small businesses, alternative lenders, unlike banks, won’t put your application on the backburner and prioritize larger loans from more established businesses.
Most businesses can expect to have their applications reviewed and approved within 24 hours, and to have the funds deposited shortly thereafter. For businesses that need to quickly solve their working capital challenges and do not have the time to go through the rigorous bank loan application and wait weeks or months for a response, this is a convenience that outweighs the added cost.
2. Alternative Lending Is Easy
The entire experience is designed to be superior to that of a bank, from streamlined submission forms to reliable customer service. You can even apply for a loan or credit line from your desk in 10 minutes – much simpler than a traditional bank application. This simplicity and transparency can be attributed to the Silicon Valley mindset of building customer-centric businesses.
For invoice factoring, it’s also easy to get access to needed cash on an ongoing basis. Once you’ve been approved for your first advance, most factors allow you to draw on your credit line without continual re-approval. Be careful when working with traditional factors, however; these are known for locking businesses into long-term contracts with unfriendly terms.
At BlueVine, we’ve seen first-hand that for business owners, having access to cash a click away alleviates stress and provides peace of mind. Alternative lending is also a private transaction, whereas there tends to be a stigma associated with making repeat visits to a bank.
3. Alternative Lending Has High Approval Rates
A chief contributing factor to the growing popularity of alternative lenders is that banks are turning down the overwhelming majority of loan applications from small business owners. In 2014, only about one in five small businesses that applied for a loan from a big bank was approved; approximately half were approved at small banks. In January 2014, alternative lenders approved approximately 64 percent of loan requests. While alternative lending is more expensive, this means alternative lenders are willing to take more risks.
Approval rates are also higher because these lenders value different assets than banks. For instance, with a merchant cash advance, these providers are most interested in your credit card sales. Since an invoice factor collects its fee when an invoice is paid, they value the credibility of the customer who owes payment on the invoice above all. Because their criteria for credit approval are different than a bank’s, alternative lenders are willing to say yes where banks would say no.
The Cost Versus Effort Tradeoff
When seeking financing, you need to know how much of the cost versus effort tradeoff you’re willing to make. Bank loans demand high effort but yield a low repayment cost, whereas alternative sources are speedy but can be pricier. Regardless of which path you take, you should survey the market, compare offerings and do your homework to ensure you secure the best financing option for your business.
Eyal Lifshitz is founder and CEO of BlueVine, leading online provider of working capital financing to small businesses, and a former principal at Greylock IL (now 83North).
The views, opinions and positions expressed within this guest post are those of the authors alone and do not represent those of CBS Small Business Pulse or the CBS Corporation. The accuracy, completeness and validity of any statements made within this article are verified solely by the authors.