The Future of Small Business Lending: 5 Predictions for the Next Decade
The world of small business lending is changing rapidly and dramatically. New startups and expanding existing businesses have never been more vital to the American economy’s growth and vitality. Yet, funding for these ventures has never been more complicated, challenging, and elusive.
How can we expect entrepreneurs to succeed if they cannot get the funding they need? This article explores the future of small business lending in America through five predictions about what will happen over the next decade.
What is Small Business Lending?
Small business lending is a loan used by small businesses to finance their operations. It is an option for established and startup companies that don’t have access to other financing sources, such as banks or venture capital firms. There are two types of small business loans: traditional and alternative.
- Traditional loans: Traditional loans typically offer lower interest rates but often require more paperwork.
- Alternative loans: Alternative loans are typically easier to get but with higher interest rates. They may also come with additional fees you wouldn’t find in traditional loans.
Alternative loans make it possible for borrowers who lack the credit score, assets, or collateral required by traditional lenders.
Alternative Loans were popularized during the 2008 financial crisis when many banks stopped making traditional loans to any company deemed risky. In some cases, these restrictions include specific industries like manufacturing or restaurants, which rely on customers with discretionary income.
What is the Future of Small Business Lending
The way businesses access and borrow money has changed significantly over the last decade, and while this trend will continue to evolve into the future, it’s hard to say how things will be in ten years. But we have predicted how small business lending will look in 2030.
1. A Growing Number of Lenders Will Serve Small Businesses
Many lenders have begun to focus on serving small businesses. This has resulted in a rapidly expanding number of lending opportunities, which is excellent news for entrepreneurs looking to get their ideas off the ground.
We predict this trend will continue over the next decade, with an increasing number of banks and credit unions branching out to serve these entrepreneurs.
2. Loan Terms Will Get Shorter
As lenders continue to be more and more risk-averse, they are beginning to offer shorter-term loans with higher interest rates to compensate.
This is to offset the high default rates we’ve seen over the past few years. If this trend continues, we may eventually see terms as short as 36 months or even 12 months.
These types of loans will have some profound implications for small business owners. They will not only have to make monthly payments rather than pay back the principal at the end of the loan, but they will also need to keep an eye on their cash flow because their monthly repayments will take money out of their accounts every month rather than once per year.
3. Interest Rates Will Remain Low
We predict that interest rates will remain low in the coming decade, making it difficult for small business owners to borrow money.
Banks are more likely to lend out money with a low risk (e.g., mortgages and government debt) than high-risk investments like startups and small businesses.
So as long as investors see low risks in other sectors, they will be unlikely to put their money into ventures that are seen as higher risk.
As a result, banks will become less inclined to offer loans or credit lines for small businesses, even if the company has a good track record. Because there’s not much flexibility in current financing options available to startups and small business loans, this trend will only worsen.
4. Online Lenders Will Grow in Popularity
Online lenders are making it easier than ever to get a business loan, even if you have a poor credit history. The future is here, and it is time to embrace the change.
If anything, online lending will be our saving grace from traditional banks and other institutions.
5. Big Banks Will Increase Their lending to Small Businesses
For a long time, large banks were happy to lend money to consumers but didn’t want to make loans to small businesses. They couldn’t make enough money off of them.
With new regulations set in place and the number of small business lending services on the rise, it is now easier than ever for small businesses to get loans from big banks.
The increase in competition will lead to better service as they try to win over more customers and offer lower rates.
Challenges in Small Business Lending
- Small businesses have relied heavily on personal and family savings to finance their growth, which could be more sustainable in a prolonged period of low-interest rates.
- The inability of small business owners to borrow money to fund new ventures or expand existing businesses has also been a significant challenge, as they need to take advantage of opportunities as they arise.
- Rising living costs, including healthcare and education expenses, have made it difficult for many individuals to save enough money for emergencies or future investments.
- Additionally, credit availability from financial institutions declined significantly during the recession, and lending standards became much more stringent because the risk was seen as too high compared with the potential reward.
According to a recent survey, more than half of small business owners feel that banks are unwilling to lend to them. Some believe this is due to stricter lending guidelines and others believe it is due to the increased number of businesses seeking financing. These challenges make it difficult for many entrepreneurs and small business owners to pursue their dreams.
In fact, according to Bank of America Merrill Lynch data, only 25% of small businesses in the US have access to debt or equity financing options.
In conclusion, many predictions have been made about the future of small business lending. The most recent prediction is that by 2030 there will be a new way to do small business lending through peer-to-peer (P2P) platforms, which are more affordable and less risky than traditional bank loans.