Will Alternative Capital Change How Small Businesses Borrow?
As the credit market for small business lending continues to feel the aftereffects of the great recession, small businesses are still struggling to obtain loans from the traditional banking establishment. In a recent article that appeared on INC.com, former SBA Chief Karen Mill’s Harvard Business School paper was cited revealing just how tough the recession was for smaller businesses, as well as the resulting “credit crunch” on the part of banks whose after-effects are still being felt today. The paper revealed the thought processes behind banks deciding to move away from smaller loans, since within traditional banking the costs of underwriting a hundred thousand dollar loan are comparable to the costs of underwriting a million dollar loan, but with a lower profit margin for the bank.
Alternative capital allows these markets to be served quickly and effectively. One of the reasons why alternative capital represents the potential for introducing major change to the way banking works is that within the industry, a different approach to underwriting has been adopted that allows financing to be approved much more quickly than a typical loan, which can often take upwards of a month to be processed. Underwriting is often based on bank statements more dominantly than credit score, allowing profitable businesses that are looking to grow a chance to gain access to capital regardless of bad credit that would typically disqualify them from bank financing. Additionally, with a move towards internet based access to funds on the part of many alternative lenders, the speed with which one can apply for a loan combined with the convenience of an internet based process represents serious potential for reworking the way that businesses access financing in real time.
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