Survey Finds More Small Business Owners Are Bypassing Traditional Lenders Entirely

Trends in home buying over the past 10 years have revealed that buyers are increasingly foregoing traditional financial institutions in favor of alternative lenders when seeking home loans and mortgages. This has become so common that six of the top ten home lenders are now non-bank entities.

While this pattern has completely upended the way many now approach the housing market, other types of common loans have not received as much scrutiny.

However, a new survey conducted by private business lender Credibly shows a similar phenomenon taking hold among small to medium-size businesses (SMB) owners.

In The Business Of Business

The poll, which was conducted  among 343 SMBs in the United States that had received funding from Credibly, explored topics ranging from the biggest challenges and opportunities facing these businesses to which areas of their operations had the greatest need for additional capital.

One of the most striking pieces of data from the report was how many SMB borrowers bypassed traditional financial lenders entirely in favor of non-bank loans. 62.5 percent of respondents claimed they did not seek a traditional bank loan before securing funding through alternative lenders.

More enlightening than the amount of SMB borrowers turning first to non-bank lenders are the reasons behind that decision.

While nearly half of the respondents believed that they would not qualify for a traditional business loan (48.6%), almost a third of those surveyed (32.2%) cited the time to receive a bank loan as the primary motivation for applying elsewhere. The remaining respondents felt that the application process for traditional bank loans was either too confusing (10.2%) or that the terms of the loans were unappealing (9.0 %).

Redefining Financing

The fact that the time to receive the loan and the loan’s size comprised just over 40 % of the respondents’ replies is revealing, especially since the vast majority of the businesses (71.5%) had been operating for more than five years and a great majority of those surveyed (76.8%) had less than $100,000 in annual revenue.

According to the survey report, “traditional bank loans tend to take 90-120 days for funds to become available, and most require business owners to seek and be eligible for at least $250,000 in financing”.

This suggests that the types of loans small businesses are seeking are uniformly smaller and more targeted than those offered by most banks, an insight shared by Credibly founder and co-CEO Ryan Rosett.

“As we've seen the number of SMB applications to Credibly rise in the past three years, the large majority of requests have been within the $15,000 to $80,000 range." said Rosett. "Credibly’s product suite has financing options ranging between $5,000 and $250,000, and we've also remained focused on the operational needs of small and medium-sized businesses. This largely means removing friction from the borrowing process so that business owners can concentrate on what they do best: operate and grow their businesses.”

As in the home mortgage space, the true impact of these new financing options on SMBs are still working their way through the business ecosystem. And, like the mortgage industry, non-bank entities are rising to meet the demand for a more agile lending framework.

What impact this will have on the entrepreneurial landscape will be interesting to observe. At the moment, the only certainty is that more disruption in the lending is inevitable.