How Small Businesses are Choosing Other Funding Options Over Traditional Banks
The trends, insights, and solutions you need to grow your business.
By signing up, you’re subscribing to our monthly email newsletter, The
Wire. You may unsubscribe at any time.
More small businesses are turning to traditional and nontraditional lending, using the funds to survive rather than expand as a solution to minimize the impact of inflation and increased prices. And for those who have sought nontraditional, alternative funding, the choice is well worth the effort of bypassing the hurdles of getting a loan from traditional banks.
According to data from the Small Business Credit Survey, a collaboration of a dozen Federal Reserve banks, 85 percent of businesses experienced financial difficulties in 2021 – up nearly 20 percentage points since 2019. To cope, almost two-thirds of businesses applied for financing to cover operating costs instead of growth and expansion, which saw a decrease of 15 percentage points the previous year.
“Pandemic-related financial assistance programs, including the Paycheck Protection Program (PPP), were widely used in 2020 and 2021, although the SBCS finds a decline in their use in the 12 months prior to the survey,” according to the report, which added that “personal funds and cash reserves remain an important source of financial stability for small businesses.”
What is Alternative Funding & Why You Should Apply
Small business owners are increasingly turning to the alternative lending marketplace to access cash to close the gap left by traditional banks and credit unions, known for their hesitancy to lend to smaller entities. Alternative funding is made up of nontraditional types of lenders such as online private lending, social lending, person-to-person lending, and microfinance and microloans. These funding options appeal to small business owners and entrepreneurs due to certain benefits that are unavailable through traditional banking institutions.
According to the online financial marketplace Fundera, alternative lenders have a greater acceptance rate than their traditional banking peers for small business funds.
Check out these few examples of alternative funding resources to see if any makes sense for your small business:
- Digital Lenders: Digital lenders use automated platforms to qualify small businesses for lines of credit and loans. These lenders tout fast and easy access to lines of credit, making them accessible to small businesses who require lesser restrictions and less lengthy time to funding. Some examples of digital lenders include Funding Circle, Kabbage, and OnDeck.
- Crowdfunding: Crowdfunding refers to raising money through philanthropic means, using sites such as GoFundMe and Kickstarter. This funding option is popular in niche markets and startups.
- Microfinancing: Microlending, or microfinancing, connects online lenders to entrepreneurs to offer smaller loans. These loans are distributed to businesses and entrepreneurs who don’t typically get qualified for traditional or bigger loans. The loans are provided in increments anywhere from $25 to as high as $50,000 and often focus on underserved populations.
- The SBA: The U.S. Small Business Administration offers guaranteed loans, making it easier for small businesses and entrepreneurs to get the funds they need from lending sources such as traditional banks. Its smallest loan program, Microloans, targets new businesses in underserved populations, including women, minorities, and veterans. Another popular option is its 7(a) loan, the SBA’s most common loan program. The funds received may be used for short- and long-term working capital needs, refinancing debt, and purchasing inventory such as office-related furniture and supplies.
Supply Chain Issues, Inflation Leads to More Borrowing
Like the Federal Reserve survey, the recently released Biz2Credit Small Business Lending Index™ reported a rise in approval rates at banks and certain non-bank lenders.
According to the small business financing company, loan approvals at large and small banks alike rose slightly in March to nearly 15 percent and 21 percent, respectively.
Meanwhile, institutional and alternative lendings continued to rise slightly as well.
“Because of supply chain issues, small businesses are sometimes having to borrow money when inventory is available and buy more than they typically would need in order to hedge against shortages,” said Biz2Credit CEO Rohit Arora. “I don’t see this changing until supply chain issues ease. Big corporations can weather the storm. It is harder for SMBs.”
“Because of supply chain issues, small businesses are sometimes having to borrow money when inventory is available and buy more than they typically would need in order to hedge against shortages. I don’t see this changing until supply chain issues ease. Big corporations can weather the storm. It is harder for SMBs.” - Biz2Credit CEO Rohit Arora
Small Businesses Get Creative with Funding Sources
According to the 2022 JPMorgan Chase Business Leaders Outlook survey, nearly half of businesses plan to use a business credit card as a source of funding, a ten percentage point increase from the previous year.
Having had to pivot multiple times over the past two years in dealing with the curveballs of the pandemic, small businesses have learned the importance of flexibility and preparing for the unexpected.
Just under a third plan to fund by using their business lines of credit. Meanwhile, nearly 70 percent say they will look into online lending options, the survey reports, an increase from 56 percent compared to the previous year.