Businesses looking for a loan no longer have to rely solely on the mainstream banks, as there are now many other alternatives available.
These providers, including challenger banks, fintech lenders, and peer-to-peer lenders, operate online, aiming to make banking quicker and easier for customers.
The growth of alternative lenders
The popularity of these providers particularly increased after the 2008 financial crisis when many SMEs struggled to obtain loans from the major banks. One way this rise has been demonstrated is through a growth in search volume for peer-to-peer lending platforms.
This increase can be partly explained by schemes such as the Capability and Innovation Fund, which aim to promote competition in the banking markets, giving businesses a wider choice of products beyond the big-name banks.
What makes these new lenders different?
The major difference between these new-style lenders and traditional banks is the speed that applications can be processed and approved.
Before these alternatives, businesses would often have to go through a lengthy bank application process and wait several weeks for an answer. However, these online lenders can determine the creditworthiness of businesses in a fraction of the time, thanks to systems such as Open Banking.
Alternative lenders may also be able to offer loans to businesses that get rejected by high-street banks. However, these alternative sources of funding may come with higher interest rates.
Where does this leave traditional banks?
Despite the growing popularity of new-style lenders, traditional banks continue to have a place in the lending market. As well as carrying a reputable and well-known name, banks are also likely to offer lower interest rates, particularly to more established businesses with capital and a good credit score.
Furthermore, a traditional bank loan may be the only viable option in certain situations, such as businesses who want to borrow a large sum over a substantial number of years.