Direct Small Business Loans: Everything You Need to Know

Every business needs access to financing.  Whether you’re in the early stages of development or ready to scale up.  But with so many options available, how do you choose the right type of financing that aligns with the unique demands of your business?

This is where an understanding of direct small business loans can help.  These loans provide a customized approach to lending, giving small business owners efficient access to financing solutions tailored to meet the specific needs of their business.

In this blog post, we’ll walk through four crucial questions to ask yourself when researching direct business lending options.  By answering these, you’ll have the knowledge and confidence to make the best financial decision for the future of your business.

What Are Direct Small Business Loans?

A direct small business loan is a financial product that is initiated and managed directly by a lending institution without third-party intermediaries, such as lending marketplaces.

Historically, banks have been the primary funding source to help American small businesses prosper.  Following the 2008 financial crisis, direct alternative lenders emerged as a viable option for businesses seeking credit as banks became more risk-averse in their lending practices.

Shortly after 2008, direct alternative lenders quickly started to outpace depository institutions in terms of annual commercial loan originations.  Prior to COVID in 2019, non-bank lenders held an estimated $550 billion in outstanding business loans across the country.  Today, these lenders command nearly 50% of new credit facilities authorized to small businesses in the U.S.

What Are Non-Bank Direct Lending Institutions?

A non-bank direct lending institution, also referred to as a direct alternative lender, is a financial company that lends to businesses without being a bank or credit union.  Unlike banks, non-bank direct lending institutions specialize in providing a diverse set of funding options for businesses looking for a reliable source of capital.

There are numerous types of non-bank direct lending institutions, and each type has a unique set of characteristics and advantages.  By understanding the various types of direct lending niches, borrowers can make an informed decision on the most suitable direct small business loan.  Here are a few lending areas that direct alternative lenders may focus on.

• Short Term Online Business Loans – Through this type of financing, funds are repaid within a shorter period than traditional business loans, usually between three to twenty-four months. These direct small business loans are provided through a streamlined digital process that is much faster than traditional banking methods. Short term online business loans are suitable for small business owners who do not have time to wait for approval from a bank and require immediate access to capital for inventory purchases, equipment upgrades or financial emergencies.

• Asset Based Lending – Asset based business loans leverage a company’s assets as collateral. These assets can include accounts receivable, inventory, equipment and property.  The lender evaluates the value of these assets and offers a loan based on a percentage of that value.  Asset based loans can be useful for companies that have a lot of assets, but may struggle with cash flow or have trouble obtaining traditional forms of financing.

• Invoice Factoring – Invoice factoring, also a form of asset based lending, provides capital to businesses by purchasing their outstanding invoices at a discount. This financing option offers businesses immediate access to cash and allows them to focus on their operations instead of waiting for their customers to pay outstanding invoices.  Similar to the aforementioned options, invoice factoring supports businesses with managing cash flow, which is essential for long-term growth.

• Merchant Cash Advance – Merchant Cash Advance (MCA) is another niche for many direct alternative lenders.  MCA lenders offer cash advances to businesses based on the future revenue generated by the business.  In exchange for the advance, the business agrees to repay the lender a percentage of its daily or weekly revenue until the high-interest rate loan is repaid.  MCA providers are a popular option for businesses that need cash very quickly.

What Are The Advantages Of Direct Small Business Loans?

Before diving into the advantages, it’s important to acknowledge the fact that each business operates within its own distinct circumstances.  While expressions such as flexible, customized and efficient are suggestive of being advantageous, it’s imperative for business owners to comprehensively understand their own priorities and requirements before making any definitive conclusions.

1. Flexible Lending Options

Unlike their banking counterparts, direct lenders have the ability to think outside the box when it comes to loan solutions.  Traditional banking institutions are known for having a rigid set of rules and regulations that limit borrowing options.  On the flip side, direct alternative lenders have more flexibility and can tailor direct small business loan terms to perfectly match a borrower’s specific circumstances.

While a traditional loan with a fixed five-year term may seem like the obvious choice, a direct lender can introduce you to alternative options.  For instance, you might benefit from a loan that is secured by your assets, or you could opt for a shorter term loan that features the option to waive interest payments upon early repayment.

It’s important to establish a good working relationship with a direct lender who has an in-depth understanding of your business.  Developing a solid partnership with a direct lender who is invested in your success can ultimately lead to a more favorable outcome in terms of direct small business loans

2. Personalized Engagement

If you choose to work with a traditional bank or a third-party marketplace representative, you should be aware that the level of attention you receive may not be as personalized as the service offered by a direct alternative lender.  Banks tend to be preoccupied with servicing a broad spectrum of financial products, not just direct small business loans.  Therefore, banking specialists may not possess the depth of knowledge that a direct lender would.

In addition, bankers operate on a more limited schedule, sometimes adhering to “banker’s hours” which can be restrictive to your schedule.  These limitations include early office closures and unavailability on weekends, which are not compatible with the busy lifestyle of most business owners.

On the other hand, direct lenders are specialized, meaning that their focus is entirely on your loan and its success.  As your business scales, they are devoted to recommending innovative financing solutions and offering personalized attention to your unique needs.  Their thorough understanding of the lending industry makes them an invaluable asset to your company, particularly during times when you are preoccupied with other aspects of running your business

3. Efficient Access to Capital

Direct alternative lenders have proven to be highly efficient and quick in their lending processes, utilizing innovative technology to streamline loan applications and approvals.  This modernized approach to lending has enabled direct non-bank lenders to offer rapid turnaround times, a feature that caters to business owners who often require speedy access to capital in order to maintain their businesses.

Amid the heightened inflation and instability that followed the recent bank failures, banks seem to be taking an even more cautious approach when it comes to extending credit, according to some sources.  The growing wave of firms looking for alternative financing options is poised to test the resilience of our financial system in the months ahead, with direct lenders expected to focus more heavily on balancing risk and return as banks continue down the path of more turndowns.

Direct lenders provide further advantages over their traditional bank counterparts by handling the entire lending process from start-to-finish.  This means eliminating inefficiencies through the involvement of intermediaries, which enhances customer trust and enables borrowers to receive a better overall lending experience.

Is A Direct Small Business Loan Right For My Business?

In today’s financial climate, accessing traditional bank loans can prove to be a challenge for many businesses.  However, direct lending is an alternative option that offers a flexible and viable solution. Direct lending provides businesses with a range of lending options that are tailored to their specific needs.  Additionally, direct lenders are often small and agile companies that can offer personalized customer service, resulting in a more client-focused experience.

Finding the best loan for your business can be an intimidating task that requires extensive research, especially during periods of peak activity.  During these times, it might make more sense to work with a lending marketplace representative.  These intermediaries can help take some of the research workload off your plate.

It is important to bear in mind that direct lenders are not as tightly regulated as traditional banking institutions.  Therefore, you should do your due diligence before entering into any agreements.  This includes examining a lender’s credentials and thoroughly reviewing the loan terms offered.

Overall, the benefits of direct lending are clear.  However, to fully take advantage of this alternative financial option, you need to factor research time into your business plan.  This will enable you to find the best type of loan for your business and secure the funds required to achieve your goals.