Traditional and alternative lenders are the two major sources for small businesses to obtain funding. But in today’s business lending environment, online alternative lenders continue to gain ground over traditional lenders.
Though traditional banks have competitive interest rates and longer repayment terms but also a complicated loan process. Moreover, they require a perfect credit score, good annual revenue, and collateral from business owners to qualify for the loan. Most of the small businesses can’t meet these qualification requirements and are denied by the banks.
Usually, small business owners apply for a loan because they have immediate cash flow problems and time. Therefore choosing a lender is all about the length of time the process takes and the distraction it causes.
Why Alternative Business Lending is Winning?
Traditional lenders generally have an application process that involves endless documents, from updated resumes to multiple years of tax returns, personal and business credit scores, annual revenue, credit history, business plans, and a lot more. As it can be imagined, applying, submitting, and re-submitting these documents can oftentimes be challenging and time-consuming for business owners.
On the contrary, alternative lenders have a more streamlined application process. They use advanced technology to review and approve a business loan application. Although some documents and processes are similar to traditional lenders, only a few documents are typically required.
Due to their conventional loan reviewing and approving processes, traditional lenders may take from a few weeks to months to evaluate a loan. Furthermore, borrowers’ credit score must be perfect and they should typically need at least two years of business financial statements.
Alternative lenders take a different approach to their business review process. They use advanced tools to determine the borrowers’ creditworthiness. And upon approval, the funds are credited into the borrowers’ business account in as little as 24-48 hours.
Most loan products provided by traditional lenders are secured. A business must pledge some valuable personal or business assets as collateral (such as property, equipment, inventory, vehicles, etc) to obtain the funds. Without enough collateral, the loan may not be approved.
Though alternative lenders also offer secured loans, they also offer various unsecured and bad-credit loans to small businesses. Invoice financing, equipment financing, merchant cash advance, microloans, short-term loans, short-term business lines of credit are some of the many loans that alternative lenders offer and don’t require collateral.
Traditional lenders may impose restrictions on how businesses can use the funds. Depending on each business’s unique financial needs, these specifications may or may not limit the owners’ uses for the funds.
Alternative lending gives business owners the flexibility to use the working capital for a variety of uses, from buying inventory, paying off debt, hiring employees, making payroll, purchasing equipment, covering daily expenses, and various other purposes.
How Traditional Lenders can Recapture this Market
By leveraging futuristic financial technology, banks and other traditional financial institutions can automate data collection and analysis and keep current business customers from switching.
Banks will never be able to meet their customer’s expectations if they continue to rely on traditional loan underwriting processes that could be automated. They must give their customers the best funding experience to grow and recapture the business loan market.
Fortunately, the business financing market is evolving. Online alternative loan specialists keep on developing their portfolios and give answers for entrepreneurs not overhauled by traditional banks. The banks have not realized if they do not act, they will also continue to lose the market. Making loan application and approval processes easy and fast can be difficult unless they digitize and automate them and use technological solutions to ease their burden.
Today, using financial and accounting data APIs such as ForwardAI’s cash flow predictive data, both traditional banks and alternative lenders can boost efficiency in loan origination, processing, and lending decisions. Integrated with the current system using these APIs, lenders can better determine a borrowers’ creditworthiness and make quick and confident credit decisions.
Leaders can reduce administrative hurdles concerning managing their jobs, like reviewing a loan application, checking a borrower’s creditworthiness, and more. Moreover, forward-looking cash flow data help them see a precise picture of their borrowers’ future financial health
Lenders will be able to integrate with all the major accounting software systems in real-time and view, track and examine all the important financial data of their borrowers in one place.