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The Role of Alternative Lending in Supporting SMEs

A person fans out U.S. dollar banknotes in front of their face.

Small and medium-sized enterprises (SMEs) play a vital role in driving the American economy and fueling the workforce.

Yet, despite how much the economy relies on SME success, traditional lending sources are often hesitant to provide entrepreneurs the funding they need.

This is where alternative lending comes into play: flexible financial solutions, tailored to the specific needs of smaller companies.

In this article, we’ll take a closer look at how vital SME lending is in today’s marketplace, and propose different financing options available for entrepreneurs.

The Problem With Traditional Lending for SMEs

When it comes to their influence on the economy, SMEs pack a much bigger punch than their name suggests.

According to the U.S. Small Business Association, SMEs account for 99.9% of all U.S. firms. Their impact is truly notorious, as they:

  • Created 63% of new jobs from 1995 through 2021.
  • Represent 97.3% of all exporters.
  • Contribute 43.5% of the country’s gross domestic product.

For SMEs to prosper, they invariably need access to capital.

Unfortunately, traditional lending from entities such as banks and credit unions has become increasingly challenging over the years for SMEs. 

According to the U.S. Chamber of Commerce, loan availability is declining, forcing owners to cover business expenses using their own personal bank accounts.

Rigorous application processes, stringent credit requirements, lengthy approval periods, strict eligibility criteria—not only do SMEs find it hard to secure financing, but they’re often denied altogether.

In fact, in March 2023 approval rates for small business loans were down to 13.8%—the lowest level since July 2021.

The obstacles put forward by traditional lending have made alternative lending options an absolute necessity

Alternative lenders help bridge the financing gap that SMEs face with traditional lenders—enabling them to grow sustainably.

Here’s a picture of just how important alternative lending has proven to be: in 2022 the total worth of the global alternative financing market was estimated at $10.82 billion. Experts predict it will continue to grow steadily by 20.2% each year through 2030.

Benefits of Alternative Lending for Small Enterprises

As long as alternative lenders support SME aspirations and fuel their success, SMEs will continue to drive innovation and economic growth. That’s the big picture.

And while traditional lending will always have a role to play in the financing landscape, alternative lending provides SMEs with a number of advantages. 

1. Flexible, Tailored Solutions

Traditional lending has pretty much the same rules for everyone.

Instead, alternative lenders truly understand the unique needs and challenges faced by SMEs. As such, they are more open to customizing loan terms and repayment schedules to align with the specific requirements of each enterprise. 

2. Fast Access to Funds

Time is often of the essence for SMEs in need of capital. Thanks to alternative lending platforms, the SME lending process is digitalized and SMEs can apply for loans and receive funding in a matter of days or even hours.

This accelerated access to funds allows enterprises to seize growth opportunities, manage cash flow, or address urgent financial needs promptly.

3. Broad Eligibility Criteria 

While traditional lenders focus solely on credit scores and financial history, alternative lending firms consider other factors, such as revenue and future prospects.

Brand new enterprises, or those that have gone through a rough patch, deserve the opportunity to secure financing.  By evaluating a broader range of criteria, alternative lenders empower a wide range of SMEs to secure the funding they need.

4. Leveled Playing Field

Alternative lending plays a crucial role in promoting financial inclusion, as entrepreneurs from diverse backgrounds, who may have been excluded from traditional financing, find the funding they deserve. 

Funding shouldn’t be an obstacle, but rather an opportunity for all SMEs to thrive, ultimately contributing to a more equitable business landscape.

Overview of Alternative Lending Options

We’ve gone over how alternative lending has positively impacted the SME community. Next, let’s get into some of the most popular SME lending options.

Merchant Cash Advances (MCAs)

A merchant cash advance (or MCA) has traditionally been used to refer to a bulk payment given to a business, with an agreement to repay via a predetermined percentage of future revenues. 

Nowadays, this term is frequently used to refer to a range of small business financing alternatives that are characterized by short repayment periods, typically less than 24 months, and smaller, regular repayments, usually made on a daily business basis. This differs from traditional bank loans, which often involve substantial monthly payments and extended repayment periods.

MCAs give SMEs the freedom to use funds for anything they need, from purchasing inventory to expanding.

Small Business Line of Credit

A line of credit provides SMEs a quick financial solution without requiring collateral. This unsecured option is ideal for enterprises that don’t have enough assets to secure traditional loans.

Borrowers only pay interest on the amount they use, as opposed to the entire loan amount. This provides a reliable source of working capital for SMEs with fluctuating cash flow needs—equally important,  it can also help them build financial credibility while offering lower interest rates compared to credit cards.

Term Loan

A term loan offers a fixed and predictable payment plan that fits into any SME’s budget. Often providing lower interest rates than other financing options like credit cards, a term loan offers a solid plan for repayment—with little paperwork and quick approval processes.

Receiving a lump sum upfront and repaying it over a set period of time can save SMEs money and hassle in the long run. With a term loan, merchants can plan for their expenses and keep finances organized with regular payments on a monthly, bi-weekly, or weekly basis.

Equipment Financing/Leasing

Especially in the early days of an enterprise, it can be daunting to invest in the equipment and technology needed for daily operations. By financing or leasing, SMEs can avoid the hefty upfront costs of purchasing equipment outright, and instead enjoy predictable monthly payments that help with budget planning.

Furthermore, this type of alternative lending allows SMEs to upgrade their equipment as technology evolves, helping them to stay competitive in the market. And because it relies on the equipment itself as collateral versus personal credit or annual revenue, this enables lower rates and more application approvals.

The Impact of Technology on SME Lending

In today’s digital era, the advent of loan management software has revolutionized SME lending.

By leveraging alternative lending platforms, both lenders and borrowers benefit from a streamlined lending process that enhances efficiencies.

On the lender side, software automates and centralizes tasks and workflows, cutting costs and time. With more resources to spend on decision-making, lenders can also take advantage of technology to reduce the risk of human error, see borrower data in real-time, and access detailed analytics.

Ultimately, all this translates into closing more deals and expanding their SME lending portfolio.

Meanwhile, borrowers benefit from the convenience of a user-friendly platform for submitting online applications, monitoring loan progress, and communicating with lenders throughout the lending journey. And the less time they spend on paperwork, the more they can focus on growing their enterprise.

Moreover, with recent advances in technology above and beyond what legacy systems provide, alternative lenders can offer borrowers unparalleled,.But don’t be fooled: while there is big-name, legacy (i.e. old and complicated) software out there, the true power lies in alternative lending platforms that leverage cutting edge technology.

Onyx IQ: Welcome to the SME Lending Revolution

One such alternative lending platform is Onyx IQ—a cloud-based SaaS lending platform. 

With our all-in-one platform, lenders can closely manage every step of the lending process, faster and more efficiently. Powered by prebuilt workflows for underwriting, customizable scorecards, real-time performance data, and much more, Onyx IQ takes SME lending to the next level.

As a lender, you can give your borrowers game-changing levels of transparency, from applications all the way through fund disbursal and collections.

SMEs all across the U.S. need funding more than ever, and rely on alternative lenders for it. Onyx IQ can help you help them—and help your own lending business.

Request a free Onyx IQ demo today.

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