Banks vs. Alternative Lenders: Which Is Best for Small Businesses?
The financial crisis of 2008 is a decade behind us. However, the top financial challenge facing small business owners continues to be access to credit. Today, 6 out of 10 small businesses in the U.S. are financially underserved. They struggle to find the funds to grow. When they do seek funds, they often turn first to those they know: main street banks.
Traditional bank loans offer many benefits. These include predictable monthly payments, low and fixed interest rates, direct access to an adviser, and the ability to build your business credit score. However, this is true only if you qualify. Moreover, you must be willing to put in the necessary work to verify all your credentials. Banks have stringent lending requirements. Businesses must be able to show success and a healthy cash position. In addition, banks require substantial collateral. This includes such things as property, equipment, or inventory. Collateral protects the bank’s investment.
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Business Bank Loans Remain Notoriously Difficult to Obtain
Unfortunately, bank lending terms make it difficult for many small businesses to qualify for a loan. It’s a reality borne out by the latest data: Banks approve only 24% of the applications they receive from small businesses. In truth, they often cannot lend less than $100,000 profitably. Yet the average small business is only looking for $20,000 to $40,000 in funding.
There are many reasons for this staggeringly high rejection rate. Lenders decline many loan applications because the business owner’s personal credit doesn’t meet a minimum threshold. That’s because banks look at both personal and business credit scores to make lending decisions. A lot of factors affect these scores. These include such things as insufficient credit history and late or missed payments to vendors and credit card companies.
Another reason that lenders decline loan applications is inadequate cash flow. Lenders want to know that you’re capable of repaying the loan while covering your other business expenses.
Likewise, small businesses can also be the targets of aggressive sales tactics or hidden fees that significantly inflate the total cost of borrowing.
Businesses Turn Instead to Personal Savings, a Risky Alternative
Because of these strict requirements, many businesses struggle to make investments that could take their success to the next level. Most turn to personal financing to fill the gap, which can expose them to risk. According to the SBA, 67% of small businesses depend on personal savings to fund growth, And only 14% make use of a bank loan.
Perhaps even more disheartening is that many business owners simply give up. They think that if anyone is going to give them a loan then it must be a bank. Then, if a single bank declines their application, they think everyone else will decline them, too. They don’t realize that there are many different types of funding products available.
Alternative Financing: A Different Approach to Small Business Credit
With traditional loans notoriously difficult to get, small businesses are increasingly turning to alternative financing options. “Alternative lending” or “alternative financing” are terms that describe any lending option that’s different from a traditional bank. Some common examples include crowdfunding, invoice financing, and lines of credit.
Alternative financing has many advantages. These benefits include speed, convenience, and looser requirements than traditional loans. This is good news for many small businesses who have not been served well by existing funding options, most of which rely on FICO scores.
For example, small business financing solutions from fintech company Fundbox have helped thousands of small businesses. Instead of relying on a personal credit check to get started, Fundbox connects with a business’s bank account. Alternatively, they can connect with the business’s approved accounting software. (Fundbox integrates with most of the popular providers.) These sources give Fundbox insight into the applicant’s business performance. With this online funding option, business owners don’t need to provide any paperwork or submit to a personal credit investigation to get started. If approved, you can draw funds as soon as the next business day and repay the loan over 12 or 24 weeks.
A Recent Example
This modern approach recognizes that while a business’s credit and FICO scores may be less than stellar, their business may be robust. It also addresses the often-smaller lending needs of small business owners. Accordingly, with Fundbox you can draw funds in increments as small as $100 and use the funds as you like.
Take the case of small business owner Tina Paclebar, owner of RevEx Inc., a logistics company based in Hayward, California. Tina had a small blemish on her personal credit that caused big banks to reject her applications for business funding.
“Big banks have not worked for us,” said Tina. That’s why she turned to Fundbox for help. Over time, Fundbox was able to approve her for $22,500 in credit by looking at RevEx’s business fundamentals instead of Tina’s personal credit. Tina has used her Fundbox Credit™ to pay for vehicles and other expenses to grow her business.
Could This Be the Solution for Your Small Business?
If you’ve been turned down by a bank for small business credit, don’t give up. And if you are concerned that lenders put too much weight on personal credit scores as a lending requirement, don’t lose heart. Consider some of the many alternative financing options to fund your plans for growth.
Interested in Fundbox? Sign up in seconds, and get a credit decision in hours here.
About the Author
Irene Malatesta, content strategist at Fundbox, is a writer who is passionate about working with entrepreneurs and mission-driven businesses to bring their stories to life.