Money Talks: Alternative Financing Might Be Right for Your Business Skipping the bank is now easier -- and more popular -- than ever.
By Stephen Sheinbaum Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
Most people stay pretty mum about their money. Business owners are no exception -- even when it comes to the cash they might need to have a discussion or two about: the capital they need to run their companies.
They used to say nothing -- at least not publicly -- if they were turned down at the bank and less still if they sought capital from a source other than a traditional bank or union.
And they were turned down often: A Harvard Business School study last year found that just 37 percent of small businesses applied for bank loans, and almost half of those -- 43 percent -- got less than what they requested. Or nothing at all.
Weeks of paperwork and waiting, wasted.
Oh, how the times have changed. Thanks to technology and a dismal bank lending climate, business owners have discovered alternative finance, and they're recognizing that it can be even better than a bank loan.
Now that's something worth talking about.
Related: Accepting Bitcoin Payments: The Risks and Benefits
In 2008, there was more than $700 billion in loans of $1 million or less outstanding to small businesses in the U.S. By the end of 2013, there was less than $600 billion of these loans. The tighter lending protocols implemented as a result of the recession were choking off capital to small businesses. And even if money were available, there were fewer banks to lend it: The total number of banking institutions in the U.S. -- which had once been more than 18,000 -- fell to about 6,300 in 2013.
This was only part of the problem.
The U.S. Small Business Administration defines a small business loan as a loan of $1 million or less. It calls a loan of less than $100,000 a "micro" loan. But most small businesses need far less than even micro. They might need $10,000 for new equipment or $40,000 for new inventory. With their costly overhead, document-intensive processes and collateral requirements, loans that small are a non-starter for banks.
It's not surprising that small businesses have found another way: alternative finance and, more specifically, alternative finance delivered over the Web.
Related: 3 Startups Offer New 'Microloan' Options for Entrepreneurs With Big Ambitions
In just a few minutes, small business owners can research finance options that better match their needs and apply. They can get small amounts for short terms. They don't need to feel shamed for a blemished credit record because alternative finance companies can be more flexible on credit risk, and they can use a broader range of metrics to gauge the likelihood of there being a problem with the funding down the road. Perhaps most importantly, business owners know almost instantly how much financing they'll qualify for.
But all of that might have counted for very little if alternative finance hadn't just become so cool. Alternative finance companies help businesses find funders they've never met who believe in their business and their prospects for growth. Business owners are speaking out about the funding they've gotten from alternative finance companies
There are now more Google searches for alternative finance than there are for some of the country's largest banks, and it's great that established businesses are creating partnerships with alternative finance companies.
With new options coming from alternative finance providers, I don't think it will be long before the alternative finance industry gets to say -- like McDonald's -- "billions and billions served."
Related: Crowdfunding's Growth Spurt Going Strong
