Although small business lending still hasn’t fully rebounded after the financial crisis that started about seven years ago, the space has grown to be diverse and more robust than in recent years. From traditional bank loans to online loans, the small business lending can be confusing to small business owners.
Traditional bank loans are still the most common financing source for small businesses, comprising approximately 67 percent with $700 billion of the current national holding of small business debt. Small business credit card debt follows with 31 percent, and the remaining small business loan products make up small margins. However, that doesn’t mean you shouldn’t pay attention to alternative financing options.
Looking long term, banks may not have the strongest growth prospects as new funding options enter the market and increase competition. In recent years bank loan portfolios went down 3 percent year-over-year, while alternative lending portfolios increased by 175 percent in the same period. Since their peak just before the 2008 recession, small business loans under $1 million have gone down by 17 percent; however, large business loans over $1 million have increased by 24 percent in the same time.
Credit cards make up $336 billion of American small business debt, which is about a third of the $900 billion in credit card debt held by all people in the United States. Using credit cards can be a slippery slope for many people, but the fact remains that credit cards are cheaper than most alternative lending options, charging 15 percent while other lenders charge 20 to 80 percent.
A/R factoring holds about $15 billion of the current small business debt in this country, making invoice factoring the third most popular small business financing option, with excellent future growth prospects. Accounts receivable factoring is most attractive to small businesses that have an unstable cash flow from waiting a long time, months or weeks after providing service, to get paid. (Like accountants or construction contractors). These companies can trade in their invoices for immediate money.
Online loans, such as Peer2Peer loans, comprise $10 billion of the U.S. small business debt. This is a paltry amount in the grand scheme of things, but online loans have been the fastest growing segment of total small business loans in America. There are many reasons why online small business loans have become so popular, mainly due to the convenience and accessibility of the internet. Online loans are also more likely to be granted to people with lower credit scores, which is appealing to Americans, as nearly 32 percent have scores below 580.
This is the small business lending landscape as it is today, but it will likely change over time.