Over the last few decades, traditional credit markets have not been a practical financing option for many SMB owners, who often need immediate access to relatively small amounts of capital.
Traditional bank loans tend to take 90-120 days for funds to become available, and most require business owners to seek at least $250,000 in financing — which makes these loans a non-starter for the small business owner who needs $20,000 to replace a critical piece of equipment or pursue an unexpected opportunity.
As a result, bank loans are no longer viewed as the first option for business owners in need of funding. According to our survey, a majority of business owners (62.5% of respondents) did not seek a traditional bank loan before securing funding through alternative lending.
And while a large proportion of those surveyed (48.6%) reported that they simply didn’t qualify for bank funding, the lengthy time to funding of traditional bank loans was the deciding factor for 32.2% of respondents. About one-tenth of SMB owners (10.2%) avoided traditional bank funding because the process was confusing or required too much effort, while a slightly smaller percentage (9.0%) reported that banks offered unappealing terms.
In terms of funding size, just over half of survey respondents (50.5%) sought less than $50,000 when seeking financing. 26.3% were looking for funding in the range of $50,000 to $100,000, and 15.8% were looking for larger funding between $100,000 and $250,000; only 7.4% of respondents sought funding amounts of $250,000 or more.
And what were these SMB owners ultimately using the funds for? “Increase working capital” was by far the most popular response, with 50.5% of respondents citing it as a primary use of funds. (Note: Respondents were allowed to choose more than one response for this question.) The second and third most popular responses were “Purchase new equipment” (30.0%) and “Purchase inventory” (28.6%), suggesting that business financing is most often needed to sustain daily operations, rather than for longer-term strategic purposes like business expansion, hiring, or marketing.
Finally, 23.1% of survey respondents reported their FICO scores as being in the highest bracket of 700 and over — a cohort of borrowers that certainly could qualify for traditional loans, but are choosing alternative capital sources instead for the advantages in speed and funding size.