In an ideal world, a young entrepreneur would be able to build a thriving business as long as they have a good idea and the work ethic to see it through. Success would always be within reach; if you just work hard enough, you’ll get there. Unfortunately—and especially since the pandemic—common lenders like traditional banks and credit unions have substantially cut back on the financial support they’re willing to extend to small businesses.
So how are today’s small business owners gaining access to the business credit they need to start, survive, and thrive? This is where small businesses are turning to alternative lenders who are stepping up to solve a financing hurdle for businesses of all sizes. Read on to learn more about different lending options and the best ways to build your business’s access to credit.
Traditional sources of credit for small businesses are drying up.
The lending landscape is bleak when it comes to traditional banks. While numbers have seen slight increases in recent years, they’re still significantly lower than where they were prior to the pandemic’s impact. According to a recent Biz2Credit Small Business Lending Index™:
- Big banks ($10 billion+ in assets) approved just 13.2% of business financing applications they received in January 2021—sharply down from 28.3% in 2020.
- Small banks (under $10 billion in assets) approved just 18.3% of business financing applications they received in January 2021—sharply down from 28.3% in 2020.
- Credit unions approved just 20.5% of business financing applications they received in January 2021—sharply down from 39.6% in 2020.
Unfortunately, these trends in financing can leave small businesses stranded and desperate for cash. But there’s good news.
Alternative and online lenders are stepping up to help small businesses gain access to credit.
Fortunately, a thriving field of alternative and online lenders are ready and willing to help where traditional lenders are leaving a void. And they’re increasingly providing additional options for small businesses in need of help.
What is alternative lending?
Alternative lenders are typically small, private companies that are usually based entirely online. Most use carefully-developed algorithms and financial software to underwrite loans and process them quickly—usually within a few days rather than the weeks or months a traditional bank might take.
What are the pros of alternative lenders?
In addition to processing applications more swiftly, alternative lenders are also well-known for flexibility and accessibility. Since they have no brick-and-mortar presence, their overhead is lower, which often gives them more freedom to invest in businesses that traditional banks might reject as being too high risk. Also, they don’t just offer loans; many also offer business lines of credit, equipment financing, invoice financing, and other core business financial products, like checking accounts.
What are the cons of alternative lenders?
Alternative financing options may come with higher interest rates than those provided at traditional banks and credit unions. Still, small businesses may find that even though this assistance comes with a higher price tag, it’s actually a small price to pay for reliable financing that helps empower them and facilitate stronger business growth.
4 steps to building access to business credit
Taking advantage of the alternative lending options out there starts with making sure you’re well-positioned to access the financing that you need as a small business. Here are four things you can do now that can significantly help increase your success in securing the business credit you need.
- Incorporate your business. That means establishing your business as a legal business entity and officially separating your business assets from yourself, the owner. Three common types of business entities include C-corps, S-corps, and Limited Liability Corporations (LLC).
- Open a business bank account. Keeping your business finances separate from your personal finances is important for a number of reasons. For one thing, you won’t have to spend hours combing through financial statements to separate business transactions from personal ones. Plus, it moves you one step closer to building business credit.
- Pay your bills on time. Payments on a line of credit, credit card, or other financing source aren’t the only metrics that credit bureaus track. They might also get payment history from your vendors or other accounts. A great way to streamline the bill-paying process with everyone from your supplier to your utility companies is to set up automated online payments. Not only does this help ensure that you never have any late payments causing delinquency on your credit report, but it also helps take a little bit of stress off your shoulders by giving you one less thing to stay on top of.
- Establish a line of credit. To build credit, you need to get credit—and then make payments in full and on time to show the business credit bureaus that you are a responsible borrower. A great place to start is by opening a risk-free line of credit from a lender like Bluevine.
Did you know?
With the Bluevine Business Line of Credit, your small business gains access to up to $250,000 in credit which you can easily take draws from when you need, and then pay only for what you use. And because Bluevine actually reports payment activity back to credit bureaus, you can easily build credit over time as you meet your payment obligations and utilize your line of credit thoughtfully.
So why a line of credit over, say, a credit card? While these two financing options are similar, lines of credit tend to offer more flexibility and opportunity for small business owners. For example:
Fees: Bluevine’s Business Line of Credit has no maintenance fees, while many business credit cards charge annual fees.
Credit Limit: The actual credit amount tends to be higher for a line of credit than a credit card.
Cash: Having a line of credit means having access to actual cash that you can deposit into your business checking account. This can be especially helpful if you haven’t gone cashless in your business and need to make a cash payment to a vendor, for example.