Traditional bank loans still reign as the top financing target for small business (SMB) borrowers, but a new report suggests alternative lenders are gaining traction.
New research released by Mercator Advisory Group on Monday (Feb. 19) noted 27 percent of small businesses surveyed in the U.S. have already used an online alternative lending platform. Its 2017 U.S. Small Business Payments and Banking Survey also found millennial small business owners are twice as likely than their older peers to have used an alternative funding solution (48 percent compared to 25 percent for business owners 35 and older).
Still, researchers noted little change between 2016 and 2017 in the number of small businesses that have never used an alternative lender, and nearly half still have not. Further, SMBs are using alternative lending platforms to obtain a faster decision, but only 7 percent say they use these services for a better interest rate.
More than 80 percent of businesses told researchers they have some type of credit line; millennial SMB owners are more likely to have a small business line of credit and less likely to have that credit from their primary financial services provider.
“Small businesses need loans to run their businesses as they are often constrained by cash flow management challenges,” said Mercator Advisory Group Senior Manager of Primary Data Services Karen Augustine, who also authored the report, in a statement. “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.”
The report is in contrast to earlier research by Reliant Funding that found just 12 percent of SMBs had used an alternative lender.
Big banks still dole out the majority of small business loans. The latest Biz2Credit Small Business Lending Index found large, traditional financial institutions (FIs) approved more than 25 percent of SMB loan applications, and that figure has been rising for several months. Alternative lenders saw a decline in SMB loan approvals in January, the report noted.