The state of small business lending seems to be improving, but very little of this improvement can be credited to traditional corporate banks. When banks all but stopped providing small business loans to those businesses with anything less than impeccable records and credit scores in 2008, the small business community sputtered along at a snail’s pace struggling to gain sufficient financing. This led to boom growth of alternative lending institutions. These are institutions that provide fast cash to businesses for a sizable fee. Hundreds of such institutions have come about since the bank collapse of 2008 with the promise of fast, short term loans for business at a price.
Such lending institutions have come under criticism for offering sky-high interest rates. They can be as high as 33 percent. These critics contend that the alternative lending institutions are taking advantage of the situation by charging exorbitant fees and percentages. Alternative lenders know that traditional banks are using any excuse they can think of to deny small business loans (short and long term loans) to applicants.
Business loans are still in demand, even when banks stop lending
Yet many others, including customers of these alternative lending institutions, aren’t complaining and instead contend that this can only be the expected result in a landscape where banks aren’t lending. After all, it can’t be expected that businesses are no longer going to need money in the form of a small business loan. As such, these alternative lenders are just filling the void left by banks when they decided to greatly reduce the number of short term and long term loans they offer to businesses.
Such alternative lending institutions justify their high small business loan rates and fees by arguing that they are taking on a higher risk. Unlike banks that take their time when issuing small business loans, such alternatives can provide cash in a few days. It is widely understood by those in banking and finance that you are going to pay a premium to obtain cash in a matter of days instead of weeks.
Unsecured business loans just cost more
Such alternative lending institutions offer these cash advances or unsecured business loans based on different computations and assessments than a corporate bank. Though they do generally look at credit score, they use complicated algorithms and formulas to run their assessments. They provide cash, credit and small business loans to those companies with poor credit scores and other issues. Because of this, it is a risker investment for them and in turn they have to charge more. It only makes sense that if you’re a struggling business with mediocre credit score that you are going to fork over more money for unsecured business loans.