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More Small Businesses in the US are turning to Alternative Lending

Dun & Bradstreet partnered with Pepperdine Graziadio Business School to investigate lending in the US. And the findings were that; more and more lending options are hitting the market for both small (below $5 million in revenue) and mid-sized firms ($5 – $100 million).

The research, titled the Q2 Private Capital Access Index(PCA Index), found that 34 percent of respondents tried to raise funds in Q2, an uptick from first quarter’s 29 percent.

Other findings from the PCA index showed that attempts to obtain a loan from traditional banks went down since Q1. Only 41 percent of companies agreed they had applied for loans from banks compared to Q1’s 49 percent.

Success rates for bank loans also went down for both small and medium-sized firms— from 41 percent in Q1 to 32 percent in the second quarter, and from 95 percent in Q1 to 89 percent in Q2 respectively.

More and more firms applied for funds with alternative lenders in the Q2 than in Q1. For instance;

  • 53 percent sought business credit cards,
  • 29 percent applied with online lenders,
  • 20 percent turned to crowdfunding,
  • 16 percent tried factoring solutions and,
  • 15 percent applied for merchant cash advances.

“As we heal from the wounds of the 2008 financial disaster and lending regulations become friendlier, it isn’t surprising to witness more and more options surface to ease access to alternative sources of funds for small businesses that don’t stand a chance with traditional banks,” said Nalanda Matia, Director of Economics Solutions at Dun & Bradstreet.

“As speculations go up on the possible reduction in interest rates by the Federal Reserve, business must now be wary of the instability in the macroeconomic fundamentals in spite of a potential ease in qualifying for both traditional and alternative forms of funding.”

“Banks have so far moved away from debt capitalization, and small to mid-sized firm are getting attracted to faster and cheaper alternative sources of lending,” stated Dr. Craig R. Everett, director of the Private Capital Markets Project at Pepperdine. “But micro-businesses must do due diligence like conducting background checks for fees and penalties. The problem with most financial firms is in the details,” warned the expert.

Businesses Not Prepared for the Consequences of Future Natural Calamities

The PCA index also revealed that a whole 74 percent of companies are not ready for the consequences that could arise from future natural disasters. Despite the floods and tornadoes that recently hit the Midwest, more than half– 56 percent— of businesses haven’t set aside an emergency fund for the unexpected interruptions in services caused by unpredicted calamities.

Most of the unprepared businesses that don’t care to consider how unforeseen calamities could impact their cash flow and bottom line often turn to external sources of financing to weather the storms.

Lastly, the PCA Index also asked respondents to comment on the status of the lending environment. 52 percent of all studied businesses said the current commercial funding ecosystem is negatively impacting their expansion opportunities, a slight rise from 47 percent in the first quarter.

Final Words

Generally, it is evident that more alternative lending options are flooding the market and hopefully conditions will get more favorable for small merchants.