Small businesses are the lifeblood of the United States economy. Recent data from the Small Business Administration (SBA) finds that these companies represent 99 percent of U.S. companies and 54 percent of total sales. They’re also a large source of employment. Since 1990, small business enterprises have added 8 million new jobs, accounting for 55 percent of all jobs. The small business may be “small,” but it has a big role to play in economic growth and unemployment rates.

However, that position chiefly depends on access to a reliable source of working capital.

Working Capital: funds used in day-to-day operations. The amount is calculated by subtracting current liabilities from current assets.

It’s a precarious place to be, particularly in today’s lending climate. Ten years ago, small businesses could have sourced funding from large and local community banks and credit unions.

The 2008 financial crisis changed everything. Many community banks were consolidated, leaving small businesses with fewer, local lending options. Large banks drastically reduced or eliminated small business loans below a certain threshold because of depreciating profit margins.

And, while government regulations didn’t actually become more stringent post-recession, they often seem that way. Federal involvement and oversight has increased since 2008. For many banks, the increased regulatory compliance makes small business lending much too expensive and labor-intensive to be considered a worthwhile activity.

The State of Small Business Lending report from Harvard Business Review paints an equally bleak picture.

  • Small business loans on banks’ balance sheets are down about 20 percent since 2008, while loans to larger businesses have risen by about 4 percent over the same time period.
  • The percentage of small business loans of total bank loans rested around 50 percent in 1995. The number has steadily declined, accounting for approximately 30 percent of total bank loans in 2012.
  • Small business owners report that competition among banks for their business peaked between 2001 and 2006 and has sharply waned since.

Banks’ responses to the crisis are unsurprising. Small business loans have always posed a risk, but decreased profit margins and increased regulatory compliance makes it more acute.

The statement, while true, is of little comfort to small businesses. They require working capital to get and keep their businesses off the ground.

Fortunately, alternative lenders like RapidAdvance have formed to fill the need. They offer financing products such as merchant cash advances and small business loans—without the red tape.

They also focus on excellent client experiences. If small business owners were frustrated with how they were being treated by a large bank, alternative lenders would offer a different experience that featured simplified application processes, faster underwriting decisions, and quick funding.

The results speak for themselves. While traditional bank lending (52 percent for small banks and 42 percent for large) remains the primary source of financing today, online lending is the second (20 percent). The percentage grows markedly as the loan amount gets smaller. Micro-loans, i.e., less than $100,000, provided by an alternative lender take 30 percent of the market. They are only slightly eclipsed by small and large banks, at 44 and 41 percent respectively.

Alternative lending’s numbers will continue to increase over the next few years. Business Insider reports that alternative small business lenders originated $5 billion and had a 4.3 percent share of the small business lending market in 2015. In a report from the Cambridge Centre for Alternative Finance, generalized alternative financing—they include online donations and equity-financed crowdfunding—grew from $11 billion in 2014 to $36 billion in 2015.

Both reports come to the same conclusion: online lending is trending upward. Business Insider projects that alternative lenders will originate $52 billion and gain a 20.7 percent share of the total small business lending market by 2020.


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