Federal Reserve Chair Janet Yellen last month revealed to Congress that the demand for small business loans in the USA has not been very high and she said this phenomenon may be attributed to the financial crisis and the fact that home values have dropped significantly.
Such comments have stirred the world of small business where optimism is pretty high. Many small business owners are projecting better financial outlook in the near future in spite a 12% decrease in loan demand
But perhaps we are looking at it from the wrong perspective. The demand for business loans from traditional lenders has dropped and it may not have anything to do with the financial crisis at all. It could be because business owners nowadays have the option to seek capital online.
Solving the Small Business Capital Crisis
The country’s economy is on the rebound and job creation rate has reached an all time high in nearly 20 years. But although the decreased appetite for risk is evident across financial institutions in the US, startups now have another alternative: online lenders.
These lenders give out loans anywhere from $5,000 to $1,000,000 or even more. Some of these lenders require daily payouts, while there are those that agree to bi-monthly and monthly payments. Loan terms are usually anywhere from 3 months to 3 years.
Business Loans USA vs. Online Financing
For startup businesses, online lenders are especially more attractive than traditional lenders because they offer something that bank loans can’t. These include:
- Fast approval
Bank loan applications take an average of 2 weeks to get approved (or rejected) and it will take another 15-60 days before they will release the loan. Online loans, on the other hand, can approve (or reject) an application within a day and release your finds within 48 hours. Any business person worth his salt would see this as a great benefit. After all, time is money.
- Less stringent requirements
While banks and other financial institutions that offer business loans will have a long list of requirements that you need to comply, online lenders only require you to fill out an application form and send your bank statements to them via email or as an attachment to your application.
- Better loan terms
There’s no denying the fact that online creditors levy higher interest rates compared to traditional lenders. However, online platforms have lower overhead, fewer middlemen and lower expenses operate so they are able to pass significant savings to the borrowers. They can afford to offer better loan terms than banks.
Many small business owners are now turning to online lenders which collectively, has become a $3.2 trillion industry in the US alone. Sure, banks are still the ideal option for large companies looking for capital financing but for small businesses and startups, alternative lending is clearly the more practical option.
Alternative lending is also not just limited to business loans. There are other types of online platforms that also specialize in factoring, which is not technically a loan but a cash advance.