Understanding the Rise of Non-Bank Lending in Business Financing

Non-bank lenders are a type of non-bank financial institution. They provide loans to businesses but do not offer other traditional financial services like checking or savings accounts. 

These borrowing options are becoming increasingly popular, especially with small businesses. In 2021, 45% of small businesses sought loans or financing from non-bank lenders, with many borrowers seeking lines of credit or cash advances secured by contracts or invoices. 

Non-bank finance companies can also offer loans secured by non-traditional methods, like stocks or business equipment. These unique options attract many businesses seeking capital, and lenders often process applications quickly and look at application criteria beyond credit scores. 

Here’s a closer look at this increasingly popular form of lending and how businesses can navigate this new borrowing landscape. 

Advantages of Non-Bank Lending for Businesses

Non-bank loans can have more business-friendly terms. For instance, non-recourse loans cap the settlement for non-payment so that the lender cannot seize more than the agreed-upon collateral, even if it does not cover the value of the loan. 

Companies also get faster application processing and more flexibility in lending criteria. In other words, your business doesn’t have to fit within the strict lending guidelines of a traditional bank. These differences make this borrowing option more suitable for a wider range of funding needs.

These are three of the most important advantages of non-bank lending:

Speed and Efficiency

Traditional banks have well-established processes for assessing loan applications. The application process, from submission to approval or denial, often takes weeks, but it can take longer and require you to submit additional financial documentation. 

Because they don’t have the same underwriting process, non-bank lenders can often process applications more quickly. They may still look at your credit score and financial statements, but they may also assess other variables like cash flow, outstanding invoices, contracts, or the value of equipment and property to use as collateral. With this more comprehensive view, they can often make decisions quickly.

This efficiency can benefit businesses in need of immediate cash flow. Your business may need a quick injection of cash to purchase more inventory or hire more workers after an unexpected increase in demand. Or, perhaps you find that you need new equipment after a competitor upgraded their technology and is now able to outperform you. 

In these situations, you lack the time to wait for a traditional loan, even if you can qualify for it.

Flexibility in Lending Criteria

Traditional banks seek to limit lending risk with a lengthy underwriting process, and they take the same safe approach when deciding on the circumstances under which to lend money. Many banks have stopped lending to small businesses altogether, and most ignore startups. 

The Federal Reserve’s Small Business Credit Survey found that only 31% of non-employer businesses and 37% of employer businesses with 0-2 years of operation had their loan applications fully funded in 2023.  

Non-banks often expand criteria beyond credit scores and revenue. For instance, they may consider a business’s assets and current contracts that could lead to additional revenue in the future. 

Also, banks may restrict the use of the borrowed funds. For instance, loans for equipment purchases must be used for that purpose. Non-bank lenders may not have these requirements, allowing borrowers to utilize the credit for a variety of operational expenses or business expansion. 

Innovative Financing Solutions

Traditional banks may accept secured loans for property or equipment, but non-bank lenders often offer a wider range of financing solutions. You can secure loans with other assets, such as securities in a stock portfolio or other business assets. 

These alternative financing solutions are ideal for small businesses that do not necessarily fit the profile that traditional bank loan underwriters look for when assessing applications. By allowing businesses to use different assets or arrangements to secure their loans, non-bank lenders create a more flexible environment that allows borrowers to find solutions that meet their current needs.  

Stock Loans as a Key Non-Bank Financing Tool

Specialized non-bank lenders allow borrowers to secure business loans with securities. These so-called stock loans are a flexible option for small businesses looking for cash to fund operations and expansions.

As a borrower, you use your stock holdings as collateral to secure the loan. In many cases, this can give you a lower interest rate than an unsecured loan, and you can also hold onto your stocks instead of selling them to generate cash. 

A stock loan can be a convenient way to generate cash if you lack collateral. For instance, if you lease property or equipment or have existing liens on your building and machinery, you may struggle to find collateral for additional loans. 

Navigating the Challenges of Non-Bank Lending

Non-bank lending is a good alternative for businesses that need capital quickly. Though the industry has oversight by agencies like the Consumer Finance Protection Bureau, non-bank lenders are not as regulated as licensed banks.