Capital and credit markets aren’t what they used to be, and for many small and medium-sized businesses that’s turning out to be a good thing. To be sure, traditional sources of funding such as bank loans, lines of credit, and venture capital continue to dominate, but the emergence of alternative funding providers — especially tech-driven online lenders — is making it easier and faster for businesses to get the money they need, when they need it.
Over the past six to seven years the outstanding portfolio balance of online lenders has been growing at an annual rate of about 175 percent, compared to a decline of about 3 percent a year in the traditional banking sector, according to a Harvard Business School working paper. While still representing only a fraction of the funding provided to small businesses, alternative funders — often referred to as “FinTech” companies — are changing the way in which those businesses access capital, by providing greater competition, price transparency, and a better customer experience.
“There is a tremendous demand for capital among smaller businesses,” says Dave Gilbert, CEO of National Funding, which has been active in this space since 1999, “and something like 90 percent of small business bank loan applications are denied. FinTech companies provide access to the capital these companies need to run and grow their business, without having to go through the laborious process of a bank loan application.”
Evidence of that demand can be seen in the high number of FinTech companies jumping into the market and the meteoric growth of some established firms. For example, Quick Bridge Funding, which launched in 2011, is now ranked No. 5 on the 2015 Inc. 500 list. Supply and demand is a major factor behind that growth, but other trends are also fueling it, says Quick Bridge Funding president Ben Gold. The trust factor is increasing, as business owners become more open to securing financing online; TV shows like Shark Tank and Blue Collar Millionaire fuel the American dream of business ownership; and technology and the internet make it easier than ever to pursue that dream.
What makes it possible for companies like National Funding to deliver up to $500,000 in funding within 24 hours is their approach to analyzing data and, in National Funding’s case, the breadth of its product mix. “There are a lot of companies out there focusing on short-term lending now, but they don’t offer the product selection we do, especially equipment leasing,” Gilbert says. “That gives us flexibility to do the best job of matching the right funding vehicle with a specific business need.”
Alternative funding is particularly well suited to business needs of limited duration, since the loans or leases provided generally matched to the time frame of the business use. “It doesn’t make sense if you have a four-month project to take on a two-year loan commitment and pay interest on the money that you’re not actually putting to work,” Gold says. “In a perfect world, you match the length of the loan to the length of the project. When it’s over, it’s easy to calculate your ROI. That is what short-term lending is designed to do.”
Originally printed in Inc. Magazine