2018 has brought much to celebrate. With the mainstream media fawning over the PyeongChang Winter Olympics, FIFA World Cup, Royal Wedding and Royal Baby, and endless political buzz, this eventful year has also brought another just as important but less covered milestone: the 10th anniversary of the 2008 financial crisis.
Ten years after the American economy took a severe downturn, economists and business owners alike are using this benchmark to analyze the impact the recession had on various aspects of the job market, housing market and finance industry. There has been an obvious loss of trust in banks as well as a loss of mobility by banks to loan money to businesses in need.
The Emergence of Alternative Funding
Extra working capital is necessary for economic growth. Before the 2008 recession but even more so after, small businesses had trouble finding outlets through which to receive extra cash flow. When banks became heavily regulated by the government with strict requirements on qualifying for a loan, the alternative funding industry emerged in response, serving the underserved market of small and medium business owners. That’s how America has always been with business, if one company can’t meet the current needs for consumers, another will.
The U.S. Small Business Administration reports that there are nearly 30 million small businesses in the United States, employing 47.8 percent of US workers. Many people think of a small business as a local cafe or family run company, but the SBA considers companies with as much as $35.5 million in sales and 1,500 employees to be “small businesses”, depending on the industry. Somehow this major market went overlooked for decades, until the alternative funding industry emerged to help.
Filling in the Bankless Gap
The impact of this relatively new source of financing has not gone unnoticed by business owners. Alternative funders are able to aid business owners in a way that banks cannot. Funders work one on one with merchants to understand their business and specific industry. By looking at the whole picture of how the company operates, funders are able to accept low credit scores as long as the business is in good health. This creates a financial opportunity for businesses that previously did not qualify for bank loans.
Funding is also short term, typically 2-15 months as opposed to bank and SBA loans that easily last 20 years, quite a long term burden. Many business owners know all to well that a 20 year loan might outlast their business. Because of the short term commitment, alternative funders are able to provide funding to low credit scores because a few months deal is much less risky than a few years.
A business will probably be in business in 5 months, but not necessarily 5 years. Businesses of all sizes also utilize the short term format as a source of bridge funding, sometimes to coast through a payroll gap while waiting on a client to pay or other times as a bridge until a bank loan kicks in, which, as mentioned earlier, can often take several months.
10 Years Later, The Evolution Continues
One of the most enticing attributes of the alternative funding industry is the timeliness allowed by the format in which the funds are provided. In a digital age, the ability to act quickly is everything. Businesses need to stay competitive by taking immediate action when an opportunity for growth arises, and funders meet this need by reviewing and approving applications for funding within a few hours and wiring the money to the account within a few days. Traditional banks just can’t compete with their long application process and months long waiting period.
Small business owners were hit the hardest when the recession caused free spending to halt. While the years following economic recovery were still rough times for running a business, a positive and necessary change arose from it. Businesses previously barred from growth by lack of extra capital for expansion finally have a solution. Big companies never had a problem meeting bank requirements with so much revenue flow and collateral. While all companies can utilize alternative funding, the unsecured and short term funding format of the industry allows small businesses to be accepted and overcome financial hurdles of running a business.
The finance industry has changed drastically in ten short years. Through a combination of digital advancements and economic changes, alternative lending has established itself as a long-term player in the competitive world of business financing. As the industry evolves and grows, more regulations are being put in place to protect both the merchants and the funders. Funding is still fairly new, but it’s clear that the industry operates in a timely and accessible way that banks simply cannot compete with.
Alex Shvarts is the CTO of FundKite, one of the fastest growing Fintech companies in New York that provides funding to small businesses across the U.S.