The Rise of direct Funding has Changed the Market Outlook for Small Businesses

The impact of COVID-19 on small business outcomes and expectations | PNAS

When a market worth $6 billion dollars is neglected by some people who assume that they have the grand design and everybody else needs to fit into it, a new market will come up in response. This is the story of direct funding which is for, by and of small businesses that were sidelined from access to easy credit by banks and traditional lenders. From the time this kind of funding first took place about one and a half decades ago, it has come a long way to become the mainstay of providing easy credit to small businesses. It takes a lender to adopt a different approach when dealing with small businesses because their needs are small but come with a lot of urgency. 

Small unsecured loans are a big help  

In US business funding, it used to be unthinkable for a borrower to get a loan from a traditional lender without providing collateral to secure the debt. In reality, many small businesses with high levels of profitability cannot produce any collateral for the simple reason that they don’t own high value assets. 

Does that mean they cannot get small business funding even with high levels of profitability? That would be grossly unfair but unfortunately this was what the small businesses had to endure before the arrival of direct lenders in the market. Today, small businesses can easily get unsecured loans based on their profitability and projections. 

Credit history is no longer a barrier 

Every borrower has a credit history based on which s/he gets a credit score and that usually determines whether s/he qualifies for a loan or not. Not anymore; you now have direct business funding wherein the lender is more interested in the viability of your business than your credit history. 

That is a far more practical approach to business funding than simply drilling into the borrower’s credit history and getting stuck in it. If all lending agencies start doing that, very soon there won’t be any small business around. Can we simply wish away small businesses that account for nearly a third of the US GDP only because funding them requires a different approach?  

Fast approvals and disbursals 

A small business owner approaches a lending agency for business capital loans only when all options run out. It needs to be remembered that these are fiercely independent and self-reliant people and they are in business because they love the challenge. Businesses, big or small, need a nudge here and a push there sometimes. 

While the big ones get funded easily by traditional lenders, the need of smaller businesses is systematically overlooked. That’s where the direct lenders funding step in with fast approvals and disbursals of the loans. Funds are like fuel in the tank for any business and they can move forward at their chosen pace only when their tanks are full. 

Any banking institution must make efforts to understand the specific credit needs of its customers. Direct funding agencies have evolved to meet the needs of small businesses that operate by a different set of fiscal rules. They may not have picture perfect cash flow statements and they may not have valuable fixed assets to hedge a loan but they are never short of growth opportunities. Finally, we need to remember that all big businesses began small. 


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