Getting the right working capital can be one of the most important processes in the life of a small business. However, today’s business landscape is constantly changing, and these shifts are being felt in the small business lending market.
A recent report from Harvard Business School titled “The State of Small Business Lending: Credit Access During the Recovery and How Technology May Change the Game” makes the case that the traditional pillars of small business lending are being overtaken by different options.
While choices like merchant cash advances and equipment leasing have always existed alongside bank credit, this part of the market has been small when compared to bank credit assets. However, the report highlights the considerable growth from these segments since the financial crisis.
“There are a broad range of alternative models emerging in commercial finance, particularly in the larger dollar small business loan segment, including receivables purchases and innovations in specialized lending by verticals,” the report stated. “Indeed, these nontraditional lending sources have proliferated through the recovery, further suggesting either that businesses are forced to seek nontraditional credit because banks remain unwilling to lend or that nontraditional lenders have found ways of providing capital to small firms with greater efficiency and convenience.”
Data from Harvard Business School showed that during the final quarter of 2013, bank loans experienced a 3.1 percent decrease year over year. Meanwhile, business credit cards saw an increase of 1 percent during the same time period, while equipment leasing got a boost of 2 percent. However, online alternatives to traditional banks saw a jump of 100 percent, showing just how strong the trend away from bank lending is becoming among small businesses.
“Despite their small scale, the technology used by these alternative players is fundamentally changing many of the ways in which small businesses access capital, creating efficiencies, greater competition, price transparency, and even making small business lending more profitable,” the report continued.
Providing small businesses with greater options
The increase in nontraditional lending channels is positive news for small business owners. Instead of being forced to contend with the obstacles presented by a traditional small business loan, owners can now turn to options like merchant cash advances.
This allows small businesses to receive the cash they need in as few as 24 hours without having to put up collateral. Along with no fixed payments, hidden fees or upfront costs, it’s clear to see why these and other options are only becoming more popular with business owners.