Borrowers may have difficulty finding funding during a recession for many reasons.
Borrowers, however, are not only limited to traditional financial institutions to source funding. Alternative lenders have carved out their own space in the market and help fuel the economy during downturns.
Read on to learn more about alternative financing options and how they can help fund your venture during a recession.
First, let’s take a look at what a recession is and what it means for borrowers.
What is a Recession?
The National Bureau of Economic Research (NBER), which officially declares recessions, defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
In other words, a recession is two sequential quarters with a significant, pervasive decline in economic activity.
Recessions are typically associated with:
- Higher borrowing costs
- Volatility in the stock market, and
- Widespread layoffs
Does a Recession Make it More Difficult for Borrowers to Get Loans?
Borrowers may experience more difficulty getting approved for a loan from a traditional financial institution during a recession.
Moreover, during an economic downturn, lenders may find themselves squeezed or under a tight budget. Why? During a recession, borrowers are more likely to delay payments, default on loans, or file bankruptcy.
As a result, traditional lenders may be more selective with loan approvals and have stricter regulations during a recession.
Banks may turn down loans due to:
Poor Debt-to-Income (DTI) Ratio
Lenders consider your history of debt and DTI to determine borrowing risk.
Inconsistent or Low Cash Flow
Lenders may reject businesses with inconsistent or poor business performance, due to concerns that the business will not be able to repay the loan.
Low Credit Score
Lenders may consider poor personal and/or business credit scores as an indication that you have high levels of outstanding debt or that you may struggle to make payments on time.
Collateral refers to the assets a business owner may pledge to the lender for the life of the loan to reduce the lender’s risk.
Particular industries associated with a high failure rate may be considered “high-risk” ventures. These industries and their risks may include, for example:
- Hospitality → Unpredictable revenue
- Alcohol and/or Firearms → Vulnerable to legislation changes that can affect business
- Gyms and Retail → Competitive, highly populated market
- Technology → Can be replaced and made obsolete within a short period of time
Read on to learn more about why banks turn down loan applications and what to do if your loan applicated is denied.
Alternative Lending Can be a Resource During a Recession
Borrowers may turn to alternative financing to fund their ventures during a recession. Let’s dive into the details.
Higher Approval Rates: When Banks Say No, Alternative Lenders Might Say Yes
As the American economy enters a recession, banks will likely deny more loans. As previously stated, the most common reasons banks decline loans include the following:
- Poor Debt-to-Income Ratio
- Inconsistent or Low Cash Flow
- Low Credit Score
- Insufficient Collateral
- Industry Concerns
While alternative lenders still consider these aspects, they are more likely to prioritize the idea or potential of a company. This allows borrowers who may not have qualified for a bank loan to access capital and grow their business.
Alternative Financing Offers Simple, Quick Application Processes
Alternative lenders have created fast application processes that allow borrowers to apply for funding faster than traditional lending counterparts.
Due to the speed and ease of the application process, borrowers have the option to apply to multiple alternative lenders to find the best fit for their venture.
Fast Turnaround Time
Similar to their application process, alternative lenders provide a quick turnaround time.
Diversity of Loans
Alternative lending provides an array of options for borrowers to choose from. Alternative financing options can include, for example:
- Hard money loans
- Lines of credit
- Bridge loans
- Asset-based loans
- And more
Plus, alternative lending still offers the basics, like a term loan. These options allow borrowers to find a fit depending on their financial situation and goals.
How Does Alternative Lending Work?
Alternative lenders typically offer loans ranging from $5,000 to $5 million and are often three to five years in duration.
Consider Applying to Both Traditional and Alternative Lending Institutions
Borrowers do not need to limit themselves to applying for capital with only alternative or traditional financial institutions. Instead, borrowers can apply to both types of lending institutions and avoid putting all their eggs in one basket, not getting the rates they want, or being denied loans altogether.
How to Cast a Wider Net and Get a Better Deal
Borrowers seeking capital can apply for capital from a mix of both traditional institutions and alternative lending options to find the best rates.
Our Strategy to Leverage Deals and Get the Best Rates
The Innovative Capital team consists of commercial bankers that are inspired to improve the results we provide our clients.
When you work with our team, we take the same loan application a bank would provide and then prepare your loan to be introduced to multiple lenders.
This strategy gives our clients:
- A professional in your corner to do the work for you so you can focus on your business and family
- The opportunity to correctly present your loan request with underwriting in mind (You don’t have a second chance to make a first impression with lenders!)
- Reduced risk of having your loan declined with no backup options
- Options to choose the loan that is best suited for their business
- The knowledge that you’re getting the best rate and term
- Access to quick funding when needed… We can fund in as little as seven days using an in-house private capital strategy
We have a lending solution for all of our clients’ unique needs. Please reach out if you’re interested in a free quote.