Working Capital Management
5 Reasons Traditional Finance is Losing Traction to Online Lending
Online lending is an alternative financing method favored by many small businesses and solopreneurs for its ease of use, quick approval, lower fees and more. In this post, we’ll explain what online lending is, explore who uses it, and share the 5 major benefits for businesses seeking financing.
When it comes time to seek outside business financing, more entrepreneurs and SMBs are choosing alternatives to small business loans. Rapid innovation in the alternative finance sector is giving small businesses across North America faster, simpler and more flexible access to the cash required to operate and grow their businesses.
Recent studies on both sides of the border show that about a third of small companies seek external financing–30% in a U.S. survey, and 34% in Canada. Among those small businesses, most (49%) intended to use their financing to support day-to-day working and operational capital expenditures.
1. Alternatives to small business loans often offer more flexible qualification criteria.
There are myriad reasons a bank might reject a small business loan but in general, your odds of being approved by a small regional bank are about 50/50. The big banks are even stingier with small businesses, approving just 25% of their loan applications (and that current figure is a record high).
Banks typically find small businesses too unstable to invest in, and applicants find the qualification criteria and application process onerous as a result.
There are alternatives, though. Across the U.S., Canada, Latin America and the Caribbean (LAC), the total market volume of alternative finance grew to $35.2 billion in 2016. Whereas traditional lenders typically want to see a lengthy credit history, business planning documents, and collateral or guarantors, alternative financing companies are willing to base their lending decisions on other criteria.
When you create an invoice funding account, for example, we evaluate the strength of your clients and the volume and amount of your invoices. Account setup takes just minutes, and there’s no lengthy application or verification process to complete. You can get approved and start funding in a couple of business days.
2. Alternative financing is often easier to use.
The days of seeking out lenders in your geographic area and doing the legwork of calling or visiting each location are over. Today, business owners can raise alternative business capital right from their laptop, or even on a mobile device.
The United States is one of the top markets in the world for technology-enabled, online alternative finance channels and instruments. In 2016, an estimated 218,188 businesses raised $9.2 billion in funds using online alternative finance channels including marketplace or P2P lending, balance sheet lending, crowdfunding, secured property lending, and invoice financing.
3. Alternative business capital can automate financing management.
There are a few major disadvantages to traditional finance as far as managing your financing needs goes. With traditional loans, you must know exactly how much you need to borrow and agree to the bank or lender’s repayment terms, which typically have your payments spread over a year or more in order to generate the interest the lender requires. Lines of credit are more flexible, but can be difficult for newer or small businesses to obtain.
With FundThrough as your business financing solution of choice, your available funding balance is reevaluated regularly based on your invoice volume and quality, repayment history, and other data. This is gathered automatically through your invoice and banking integrations. Repayment takes place over 12 weeks, with weekly reminders and the option to skip a repayment date to ensure your cash flow isn’t affected. There’s also the option to repay early and save on the remaining funding fees, making invoice funding possible with as little as 0.5% fee.
These integrations and efficiencies take the guesswork out of your capital financing and leave you free to do what you do best: running your business.
4. Alternative finance can grow with your business.
One of our automated processes is that of evaluating your account for credit limit increases. Many of our clients use FundThrough to fund business growth, as it speeds up their receivables cycle. This can enable you to take on bigger contracts, expand your inventory, or develop a new product line, all by putting money you’ve already earned to work instead of waiting to get paid.
“I was launching a new product and that meant additional costs. Instead of waiting 30 to 40 days for my largest customer to pay, with FundThrough I actually got the funds right then. That meant I could start production right away.” ~ Justyna Kozlowska, Owner – Nagi
Traditional finance is inherently slow and cumbersome. Each new financing need requires a new pitch or application process, with a new round of paperwork to back the request.
Not so with many alternative finance options. Technology-enabled financing means much of the data needed to back a funding request is already available to the funder.
5. Enjoy lower interest rates and a simple fee structure.
Comparing your financing rates across traditional channels can be confusing. If you get a loan, you need to figure out the total cost including interest fees over the life of the loan. Using a credit card for financing might seem attractive at a glance, but between compound interest, late payment penalties, annual fees, and other charges, it can be a costly method of spurring on cash flow. And of course, angel and VC funding can mean giving up control, ownership, and a share of future earnings.
Invoice funding offers the cash flow you need to bridge gaps in your receivables without saddling you with hefty fees or interest charges. Each invoice you fund is typically deposited into your bank account within one business day, and repayment takes place over 12 weeks (or less, it’s your choice). The total cost of borrowing is as low as 0.5%. You can estimate your invoice funding costs in one simple step online here.
Break Free of the Red Tape of Traditional Finance with Innovative Alternative Business Capital Solutions
Save time and frustration even while accessing the capital needed to run and grow your business. It’s time to move beyond your grandfather’s stale, static financing options, and the world of fintech is making it possible.
Want to learn more? Start by grabbing a coffee, getting comfortable, and digging into The Ultimate Alternative Finance Guide. Your alt finance bible, it holds within it the keys to crowdfunding, peer-to-peer lending, small business lines of credit, merchant cash advances, invoice factoring, and more.
In a hurry? Head on over to this page for a 3-minute crash course in invoice factoring, instead.
Finance your business, today.
- The Americas 2017 Alternative Finance Industry Report, Cambridge Centre for Alternative Finance
- Healthy cash flows slow small- and mid-size businesses’ need for financing, Financial Post.
- Credit Condition Trends 2009–2016, Government of Canada Innovation Science and Economic Development.