Getting a business loan has always been fraught with obstacles for many small business owners, but the recent recession made things even harder. Initially, traditional lenders stopped making any loans at all. Then they started lending again, but they set the qualifying bar much higher.
That bar became even harder to hurdle after the recession left many small businesses owners with less-than-stellar credit scores. Fortunately, the lending game has completely changed—thanks to Big Data—and it is the traditional lenders, not small businesses that will be left behind.
A New Breed of Alternative Small Business Lenders
"Banks look back at past history, while alternative sources assess past, present and future opportunities," explains Karlene Sinclair-Robinson, author of Spank the Bank: The Guide To Alternative Business Financing.
And how do alternative lenders assess a small business' present and future opportunities? They use big data tools and techniques, including predictive analytics, to see what's in your business' future.
"Small business and commercial lending has seen great disruption due to the incorporation of big data," says John Lynch, marketing director of Express Business Loans, formerly Citi Wide Merchant Funding. "Hundreds of data points are now incorporated into the underwriting process."
It's natural to wonder if traditional banks use big data tools and techniques too, and the answer to that is yes, they do. However, they still stick to the old model of primarily considering credit scores from traditional credit bureaus rather than balance the scales with new, more relevant information.
"Credit conditions in the small business market continue to remain tight even though commercial banks began easing lending conditions in mid-2010," according to a spokesperson for PayPal. "In August, according to a report by The Federal Reserve Bank of Cleveland, the total value of small business loans in the fourth quarter of 2012 was 78 percent less than in the second quarter in 2007."
Alternative lenders on the other hand, consider all the data in a more equitably weighted fashion. The result is a fairer and often far more positive consideration of your loan request. The terms can also be better for your cash flow as some lenders don't require a set monthly payment, and most of the lenders loan the money quickly.
Alternative Funding Sources for Startups
If your company is just getting started, you'll likely fare best with alternative funding sources geared towards startups.
"Banks do not give loans to new companies, and they're very selective even with established companies, which is why entrepreneurs almost always have to use other lenders," says Alex Genadinik, founder of Problemio, the company behind some of the top mobile apps for planning and starting a business. "Some popular lenders are Lendio and Prosper. Crowdfunding is also popular."
New Alternative Funding Programs
PayPal recently launched an intriguing new program, called PayPal Working Capital, for businesses that accept customer payments via PayPal. Unlike traditional bank loans and credit cards, PayPal doesn’t require a credit check, because a business's credit worthiness is based on the strength of its PayPal sales.
"WebBank is the lender for PayPal Working Capital, and since WebBank is responsible for verifying the identity of the applicant, it must use a trusted third-party for this verification," says PayPal's spokesperson. "PayPal chose Lexis Nexis as the partner for this verification, and many large banks use Lexis Nexis. Buyers are qualified based on their PayPal sales history."
There's also no set monthly payment, since PayPal allows a business to repay the loan with a share of its PayPal sales. When there are no sales, there is no payment due.
"It's a revolutionary concept that allows PayPal merchants the flexibility to pay when they get paid," says PayPal's representative. "PayPal Working Capital does not charge periodic interest. Instead it offers one affordable fixed fee that a business chooses before signing up—there are no periodic interest fees, no late fees, no pre-payment fees, or any other hidden fees.
PayPal's rep pointed out how this practice compares to traditional credit, where "businesses report they seldom know how much they ultimately pay in interest and other fees."