Small businesses represent a significant portion of the American economy — 54 percent of sales happen with small businesses, and these companies provide 60 to 80 percent of the jobs in the country. However, small businesses still struggle to get funding. Without adequate access to loans, many small businesses have no choice but to forgo growth or close their doors altogether. Recently, however, unsecured loans, particularly from a new generation of alternative lenders, are meeting the needs of this surprisingly underserved market and helping entrepreneurs to stand on their own two feet.
Barriers to Traditional Financing Options
For the last couple of years, the media has been abuzz with news that business loans are easier to get than they have been since the onset of the great recession. While this is true in a strictly comparative sense, business loans are still hard to obtain, and roughly three-quarters of applicants walk away empty handed, after applying with traditional banks.
Some businesses turn to complicated financial maneuvering to set up equity based financing, or they launch crowdfunding campaigns online. Others turn to the time honored (and often emotionally messy and unpleasant) tradition of borrowing money from friends or family. All of these options take time and potentially dilute ownership of the business.
A New Generation of Alternative Lenders
To quell dissatisfaction around small business loans, a new generation of alternative lenders has stepped into the fray. Companies such as Kabbage, PayPal Working Capital and SnapCap have figured out effective ways to loan money to small businesses. To reduce the risk on their end, these companies use smart algorithms that take into account multiple data points to create an accurate risk profile of business borrowers. These complex analyses include everything from accounting and financial details to social data on customer engagement.
Driven by internet culture and innovation, these lenders foster an application process that takes just minutes to complete, as lenders link various online accounts to the application. Review and funding also happen almost instantaneously. All of this combines to give fledgling entrepreneurs greater and easier access to capital than they’ve ever enjoyed before.
Secured Versus Unsecured Loans
In particular, alternative lenders are offering unsecured business loans. These loans aren’t backed by any collateral, other than the word of the borrower. That safeguards borrowers’ entrepreneurial capital and gives them ultimate control over their assets. In the past, if an entrepreneur had trouble getting a business loan, they may have felt cornered into backing the loan with personal collateral, such as their assets or home. To put it simply, if their business failed, they lost their home. Unsecured loans eliminate this scary risk.
In other cases, business borrowers often back loans with collateral owned by the business. While this works in many cases, it can prevent business owners from selling or upgrading certain assets. By turning to unsecured loans instead, entrepreneurs are able to retain complete control of their business assets, and that gives them the freedom to make financial decisions based on their needs for business growth, not based on the arbitrary terms of a loan.
The increased access to top loans for entrepreneurs isn’t just hype. Take the story of Kevin. When he started the Wet Shave Club, his business began growing faster than his wildest expectations. The company ran on a subscription based model where buyers signed up and paid a monthly fee to receive razors in the mail. To meet orders, Kevin needed to ensure he had enough inventory on hand to fill his current subscriber list as well as enough inventory to meet the needs of any new subscribers. However, his supply line dictated that he needed to put in orders two to three months before dispatching the razors to clients.
To ensure he ordered enough to meet current and growing demand, Kevin needed extra capital, but banks repeatedly turned down his loan applications. When he finally turned to alternative lender Kabbage, the results were different. Kabbage could see Kevin had the revenue and the potential in place to repay the loan, so it gave him a $19,000 line of credit. With ongoing access to that capital, Kevin was able to focus on activities that boosted conversion rates and increased sales. Ultimately, he repaid the loan and was able to stand on his own two feet without it.
Loans to Foster Growth
With the difficulty of accessing traditional funding, many businesses have had to cut their capital needs to turn to microloans or personal credit cards with relatively low spending limits. While these financial resources have a time and a place, they often can’t provide entrepreneurs with ample capital to invest in equipment, make other substantial capital purchases, develop new products or expand into new markets. Online unsecured loans meet this need. These loans can provide borrowers with up to $100,000 so they can truly fund the investments they need to make.
Before small businesses can start running toward success, they need to be able to stand on their own two feet, and in some cases, that requires a bit of extra capital. Unsecured online loans are helping businesses get the boost they need. These loans are rising in popularity and finding new ways to meet the needs of the underserved market of small business borrowers every day.