Alternative lenders have grown in popularity as entrepreneurs face greater challenges in accessing capital through traditional financial institutions. Financial technology, or fintech, has made significant inroads into small business lending as entrepreneurs seek online options to fund their business.
This form of lending can be appealing since it offers the convenience of completing the loan application online, a wide range of loan options, flexible underwriting, and a fast-paced process to approve and disburse funds. It can also be more accessible to borrowers who might otherwise be turned down by banks because they lack capital, don’t have a business record, or otherwise present a greater risk to lenders.
The disadvantage to alternative lenders is that they aren’t as well regulated, and so might not be as reputable as traditional lenders. In particular, alternative lenders often charge interest rates that are exorbitantly high. Repayment conditions can also be more onerous, including shorter terms and more frequent payment requirements.
InnovatorsLINK cautions entrepreneurs about using alternative lenders, as the expense of repayment conditions can easily create a drag on business budgets. We have also advocated for improved regulation of alternative lenders, and you can read that position here.