Ever since the infamous financial crisis of 2007-08 things in the finance world have changed drastically. The things that were once considered the only option for financing small businesses have now been labeled as traditional, and new, alternative options have arisen to meet the needs of the economy. And it is best to have information on both options and see for yourself what works advantageously for your business and your needs.
Traditional Debt Financing is Provided by Banks
Debt financing means that when a business gets a loan from a bank of their choice that they have agreed to pay back the borrowed sum, plus the interest and that collateral has been established.
The Structure of the Loan
The loan is usually paid back in monthly installments. Nowadays most small businesses find it very difficult to get business loans from a bank, they require a large amount of paperwork and banks tend to favor bigger loans as they bring more profit to the bank than small ones.
Crowd-funding is One Alternative Method
This is one of the two alternative methods to lending that has grown popular in the recent years. And this is how it works: small amounts of money are pledged for a project on a platform that is usually on the internet (like Kickstarter for example). Large amounts of people are participating in this and instead of traditional investors anyone from the general public can invest money.
Peer-to-peer Lending is Getting More Popular Worldwide
The other successful method is peer-to-peer lending where an online service creates a link between lending companies and borrowers, and these can be individuals or businesses. This is considered to be more risky than borrowing from a financial institution like a bank, but they are easier to get for business owners and usually have lower interest rates.
Structured Finance Helps Reduce the Risk
Structured finance is a very complicated and complex part of the finance world that was created around 1980 to help reduce risk. In times when a normal loan is simply not enough for a company, more complex finance instruments are put to use. These kinds of loans are offered only to large borrowers and small businesses are not one of them. Some examples of structured finance are collateralized debt obligations, mortgage-backed securities and syndicated loans.
Small Business Loans are more focused to alternative options after the Financial Crisis
Structured finance has contributed to the downfall of the economy and the financial crisis of 2007-08 and small business loans of today have turned their attention to alternative methods of getting funds as the banks are not trustworthy as they used to be.
Small Businesses are facing challenges across the Globe
Small businesses are still facing challenges every day in the need to find a secure and healthy way to keep their finances in order and to borrow funds without too much difficulty.
The Interest Rates are sometimes high for Small Business Loans
Lending companies know that small businesses have a high need for funds (whether they need to get new equipment and machinery or pay vendors) and sometimes they have high interest rates for these loans.
Lowest Interest Rates in Recent Years
The prime rate is the lowest interest rate the bank or lending company will charge, and in the last 5 years it has been 3.25%. Loans under $100,000 usually have the interest rate around 7% to 8%.
- The financial crisis has changed the way people lend money today.
- Alternative options make lending money easier for business owners.
- Today small businesses have a hard time getting loans from banks.
- Bigger loans bring more profit to banks.
- Crowdfunding platforms are helpful to the economy.
- Online peer-to-peer lending makes borrowing money a fast process.
- Peer-to-peer lending services have lower interest rates than banks.
- There are complex finance instruments for large companies that need an injection of funds.
- It is difficult for small businesses to get loans nowadays from banks.
- Smaller loans have the interest rate of 7-8%.
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