Traditional Banks vs Alternative Lenders

According to a survey one out of 10 small business owners feel credit has dried up and banks have stopped lending to small businesses. At the same time, the borrowing needs of small businesses remain elevated, with 39% of owners anticipating taking out a new loan or increasing the existing credit line in the next 12 months.

Should traditional banks be concerned about losing business to alternative lenders (i.e. On deck, Kabbage, Lending Club, etc.)

15% of small business owners have applied for a business loan from an online lender that is not a traditional financial institution. While the current threat to banks may be minimal, it is increasing. A quarter of small business owners indicate they are extremely or very likely to use an alternative lender for their small business loan needs in the future.

What is the appeal of alternative lenders to small businesses?
What do they offer that traditional lenders do not? 

For many small businesses, the answer is simple: A loan. 72% of those that have used alternative lenders in the past have done so because they were unable to obtain their needed financing from a traditional bank. This may be somewhat of a relief to business bankers concerned with the competitive threat online lenders may pose, as many of the loans in the alternative market may not be ones they could – or want to – originate. In these cases, the real threat is the uncertainty as to what happens next with the business and any future banking relationships.  Assuming the small business would eventually qualify for a loan from a traditional bank, will they return to their local banker, or was their initial experience with the online lender good enough to also win future business?

For many small businesses, pricing and loan terms will certainly influence decisions when they have more options. But we also know from past research that the speed and efficiency of the loan process also plays a significant role. 

If alternative lenders prove to be a feeder market for traditional banks, the expectations of the business owner may be forever altered by their experience with the online lender. Will the loan application and approval process at a traditional bank seem inefficient compared to the speed and technology offered by online lenders?

For small businesses headed by members of Gen Y (born 1977-1994) this question is even more relevant as this demographic is particularly attracted to the ease and immediacy promised by online lenders.
Small business owners’ increasingly high expectations add additional pressure for traditional banks to continue to innovate and perhaps re-evaluate the existing loan underwriting process. This may be where alternative lenders have the greatest impact on traditional financial institutions.

While alternative lending may still be viewed as a niche product today, small businesses are being influenced by the innovation and technology offered by these newer entrants to the business credit market.

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