Small Business, Banks Embrace Credit Alternatives

Banks — the stalwarts of traditional lending — are finding new channels and conduits to getting capital to borrowers, across alternative channels, and with FinTech collaborations forged and expanded.

Alternative lending (or alt-lending) gets funding, typically short-term in nature, to borrowers, with one particular ready-made audience extant in the form of small business applicants.

The traditional channels have been tougher to navigate as of late. In 2022, the Federal Reserve reported that approval rates for small business loans had been declining since 2017. Data from the Fed as recently as this month found that in the meantime, as many as 9 in 10 smaller firms had experienced operational challenges in the previous year. PYMNTS Intelligence reported in early March that new lending had declined by mid-single-digit percentage points year over year.

The platforms and the digital providers that offer advances and loans — in turn backed by investors — based on a slew of different data points (including payment trends) have been able to fill at least some of the gap.

Some Recent Announcements

And in a nod to the linkups between banks and alternative credit players, BNY Mellon said Wednesday (March 20) that it has expanded its partnership between alternative credit specialist CIFC and BNY Mellon Investment Management (IM). As part of the expansion, BNY Mellon IM will have access to CIFC’s U.S. direct lending strategy on its global distribution platform for clients across EMEA and APAC. Private capital is in demand, the companies said, as many European firms are underserved. Earlier this year, and as had been widely reported, JPMorgan Chase was in  discussions to form partnerships with the likes of FS Investments and Octagon Credit Investors to broaden its private credit efforts.

Elsewhere, and also in a March 2024 announcement, Nova Credit has introduced its Nova Credit Platform, which is aimed at transforming how lenders manage and analyze consumer credit data.

The market opportunity is significant. BlackRock has estimated private credit to be a $1.3 trillion market, where direct lending is the largest component.

PYMNTS Intelligence has estimated only about 8.5% of small and medium-sized businesses (SMBs) have said that they’d found working capital loans from banks were readily available. Conversely, 11% said loans were perceived as being available from online vendors. More than half of respondents said coming into 2024 that they would consider tapping new financing. Of the companies mulling new financing, the data show that more than 26% would consider using an online lender; about a third would use a large national bank.

The tie-ups between the banks and the FinTechs and the alternative lending channels, then, might bring all those options together to help boost revenues for the lenders and provide needed, ready capital to the SMBs.