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Alternative Lending Increases, Bank Lending Slows Down

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With the biggest banks in the United States cutting back on small business lending, alternative lenders are attracting more borrowers than ever before.

According to The Wall Street Journal, citing an analysis of the banks' federal regulatory filings, "10 of the largest banks issuing small loans to business lent $44.7 billion in 2014."

While that sounds like a lot of money (and it is), it is actually a 38% decrease when compared to $72.5 billion in 2006.

At SurePayroll, we have been tracking the growth of alternative lending for more than a year.

Benefits of Alternative Lenders

With this decrease in loan activity from the banks, alternative lenders have carved out a niche. Despite significantly higher interest rates, small businesses are attracted to these lenders for several reasons:

  • They are willing to lend the money and do so quickly.
  • They are willing to lend more money.
  • They have streamlined the application process.

Companies such as OnDeck and Kabbage, among others, continue to provide small businesses with an alternative to traditional bank financing.

In a recent survey of small business owners, we dug up the following data on how they feel about this new method of acquiring capital:

  • 11 percent of small business owners have used some form of alternative lending.
  • 38 percent of small business owners would consider using an alternative lender.
  • 41 percent of small business owners said they do not trust alternative lenders.

Drawbacks of Alternative Lenders

Even with the benefits detailed above, small businesses should be aware of the potential problems associated with alternative lending. These include but are not limited to:

  • Loan brokers who steer businesses to a particular lender in an attempt to earn a large commission.
  • Qualifying for a loan they cannot afford.
  • Paying above average interest on the loan.

If traditional lenders continue to cut back on small business lending, it is only natural for alternative lenders to pick up the slack.