Alternative Finance No Longer SMBs’ Last Resort

Alternative finance (AltFin) has had a rocky lifespan, with controversies over high interest rates, contract agreements and the overall viability of the industry being called into question in the past. Today, however, investors continue to back companies that want to help borrowers find a source of capital beyond the bank.

When it comes to small businesses (SMBs), awareness of alternative finance options were low at first. However, last year, researchers at Mercator Advisory Group found that more than one-quarter of U.S. small business owners had already used an alternative lending platform, with younger entrepreneurs the most likely to turn to alt lending.

Still, when that compares to traditional banks’ small business lending power, alternative finance remains merely a drop in the bucket. Earlier last year, Reliant Funding research found only 12 percent of small businesses had used an alternative lender, for example, while Mercator’s report found that the portion of SMBs that had never used an alternative lender — nearly half — didn’t budge between 2016 and 2017.

The rise of traditional lenders collaborating with alternative players has propelled awareness and adoption of alternative finance among small business borrowers. In addition, initiatives like the U.K.’s bank referral scheme has shed light on the role of alternative lenders for SMBs that are rejected by their first choices: a bank loan.

Yet, new reports on the topic have suggested that small businesses are beginning to bypass banks altogether when searching for working capital, with the small business accountant becoming a new ally to AltFin for small business customers. Check out some of the key data points from those reports below.

According to Credibly‘s SMB Forecast Report, published this month, 62.5 percent of small businesses did not seek a traditional bank loan before turning to alternative lending. The survey asked 343 U.S. SMB owners about their financial plans and outlooks, and it’s important to note that the survey respondents were all previous customers of Credibly. However, what’s notable about this statistic is the number of Credibly customers that never started at the bank. In its report, Credibly pointed to the lower credit values sought by entrepreneurs, as well as the length of time for bank loan funds to become available, as key factors behind SMBs’ decisions to start with alt lenders.

Nearly one-third (32.2 percent) of SMBs said the length of time it would take to receive funds from a bank loan was the deciding factor behind why they turned to alternative lenders. In addition, 48.6 percent said their decisions to turn to alt lenders first was motivated by the fact that they knew they wouldn’t qualify for a bank loan. One-tenth of entrepreneurs called the banks out on a complicated application process.

The reports found that 39.5 percent of small firms said managing working capital and operating expenses was their biggest challenge, followed closely by credit availability or securing additional funds. Making payments on existing debt is also proving to be a headache for small businesses, the report said. The struggle of managing day-to-day expenses is a key factor behind businesses’ efforts to seek financing, with more than half of SMBs reporting that they use loans as a primary source of funds (followed by purchasing new equipment and inventory).

According to MarketInvoice‘s latest research, 66 percent of small business accountants in the U.K. have recommended an external finance provider to their clients. Reports in Verdict this month noted that half said traditional banks remain their top recommendation for small businesses, though more than one-third said they first point their customers to invoice financing providers. In a statement, MarketInvoice Head of Strategic Partnerships Tom Davenport said the data “reveals that accountants are stepping up and advising their clients about funding opportunities,” adding that the company has also seen in-house finance executives advising small businesses on their options when it comes to financing. “This research also dispels the myth that invoice finance is a last resort for businesses,” he continued.