As the global coronavirus pandemic spread, lockdowns and financial struggles came with it. 2020 was a terrible year for almost every small business, with closures at an all-time high. This has led to an economic crisis all over the world.
Although the vaccine has been released, and things look better in 2021 than 2020, things have changed. Businesses have suffered, credit scores have dropped, and debt is on the rise. Businesses need funding, and now we are beginning to see alternative options on the rise. So what will business financing look like after COVID-19? The future is in alternative lending.
What is Alternative Lending?
Alternative lending refers to any type of lending practice happening outside of a standard banking institution. Alternative lending is different from a standard loan. Many alternative lending operators work online and use new-age methods such as peer-to-peer lending. Alternative lending connects business owners who need funding, to investors who are able to provide it.
For small businesses, alternative lending can provide easier access to loans. Especially for businesses that are just becoming established, alternative financing can provide access to funds that were never available. Rather than only focus on credit, other factors are used. Alternative lending often also offers lower interest rates. Because these lenders look at the overall financial picture, it is easier to determine how someone will repay their loan.
These advantages come with a few disadvantages as well. Unfortunately, the alternative lending market suffers from poor regulatory oversight. This means there is a risk of fraud losses for lenders if due diligence procedures are not put into place. This leads to a higher risk of loss as compared to traditional lending.
How COVID has Impacted Alternative Financing so far?
With the COVID-19 pandemic on the rise, the number of businesses that were suffering financially also rose. Fewer small businesses actually went to traditional lenders to obtain a loan, but there was also a decrease in success rates for credit applications. Many small businesses closed through the pandemic, while larger companies grew tenfold.
Instead of banks providing lending during this time, the growing sector was in alternative lending. This has provided a whole chunk of funding to entrepreneurs seeking business financing. In reality, as alternative lending options have become more available, banks also became more unwilling to take a risk in terms of funding. This has led small businesses to avoid banks. The alternative financing sector has grown 17% year on year, with business lending being 70% of that.
This has led new lenders to enter the market, creating a more competitive situation. This benefits entrepreneurs over anyone else. With more options to choose from, brokers will then be forced to offer a broader range of lending options, along with the best rates available, especially compared to traditional lending.
Future Outlook on Alternative Lending Post Pandemic
As we move into 2021, the same story continues from 2020 and coronavirus. This makes it extremely difficult to understand how the country plans to move forward, but there are projections.
An Industry ARC report has shown that the expectation of alternative finance is that of accelerated growth. You might expect this area to grow in terms of personal loans, but this area is expected to grow especially in the real estate sector.
Easier Overall Process
Due to the low interest rates and ease of lending online, it leads to a faster approval process. Alternative lending is also much more transparent than traditional financial institutions. The United States Expects to see a 19% growth rate in the next year alone.
Traditional Funding is Intimidating
This is mostly in part because business owners feel more comfortable when it comes to alternative funding. Many entrepreneurs have been intimidated by the standard practice of obtaining a loan. The experience of applying for government grants and loans during a difficult time financially simply does not work. This is why the online borrowing trend is sure to be continued post-pandemic.
Micro-Loans Will Continue to Grow
The micro-loan business is expected to grow as well in the post-pandemic world. Small loans for certain industries can be life-changing for small businesses. These loans can fill in the funding gaps that currently exist in the business and financing world. Although these were considered too risky by traditional lenders, it works for new investors with capital.
Small Businesses Will Feed Digital Lending Growth
As time goes on the world will heal, and advances in different forms of fintech will continue to change the industry. Not only will this push digital loans to be an industry leader, but it will become easier all around. Everyone likes the ease of use. As millennials and gen Z borrowers become the primary consumers, everything will move online. This may push traditional lenders to compete more with the new online space, but it is not certain how this will be achieved. Digital lending benefits from easy access and more unique ways to determine the eligibility of the borrower.
Alternative Lending Options Post Pandemic
Here is a list of the different types of alternative lending options post pandemic.
- Small business loans: All lenders that offer this type of loan are considered alternative lenders. The types of lending offered are direct-to-market lending, business lines of credit, equipment financing, and other methods other than SBA loans.
- Business lines of credit: When you obtain a line of credit you are given a fixed amount of money that an alternative lender extends to a borrower. Similar to the case of a line of credit from a bank, you can take from this line of credit up to the fixed amount and only pay interest on the amount you borrow.
- Equipment Financing: Equipment financing is the use of a loan to purchase equipment a business needs to operate. It is different from other loans in that equipment financing relies on the equipment itself as collateral. Should the loan not be paid back, the borrower loses the equipment.
- Accounts Receivable Financing: Also known as a merchant cash advance, this type of alternative financing offers a business cash upfront in exchange for future credit card sales. They provide a lump sum of money and can often be transferred within only one day. After being issued, the borrower must pay it back through a percentage of their business’s daily credit card revenue.
- SBA Loans: Bank loans or loans from the U.S. Small Business Administration are called SBA loans. Sometimes small business owners can’t qualify for these loans. In these cases, alternative lenders offer ways to access the capital you need to grow a small business.
Secure Funding for Your Business post-pandemic
If you are looking to get a business loan via alternative lending then you may be in luck. Some lenders provide lending options to those with bad credit, and instead of looking at a credit score, the lender will have other qualifications.
There are various options available for small businesses looking for alternative lending options.