Are Alternative Lending Services Still Alternative?

The 2008 economic crisis left a big credit vacuum to fill. Big banks lost our trust. New laws put “traditional” credit out of reach for many.

Fortunately, alternative lending services—like Kabbage and OnDeck—swooped in. With simpler applications and easier access to cash, these new players offered what the big guys no longer could.

By creating a sweet spot that makes borrowing money easier—with friendlier rates than, say, payday loans—these lenders were immediately attractive to small business borrowers. Their popularity has continued to grow in the years since, and it’s obvious that alternative lending companies are here to stay.

Which begs the question—in this new reality, is “alternative” lending really that ‘alternative’ anymore?

What’s the Draw?

Let’s start with the basics. What does “alternative” lending” mean, anyway?

Simply put, it’s any loan you get outside of a traditional bank. Free of the tight regulation that banks must obey, it’s easier to borrow money from an alternative lender. But it’s also more expensive. While some might frown at paying higher fees and interest rates, alternative lenders have found plenty of willing—and satisfied—customers.

If you’re a young entrepreneur or small business owner with little or no credit, taking a loan with higher fees is better than taking no loan at all. Check out any alternative lending site and you’ll find stories of people saving their businesses with a well-timed loan, or using the money to finally get that big upgrade to put them ahead of the competition.

A Growing Population

As the millennial generation continues to take over in the economy, alternative lenders will only become more mainstream. Back in 2014, millennials were over four times more likely to have received a non-traditional loan than a Gen-Xer.

And it makes sense. Younger generations are more comfortable with technology and more willing to try new things. Getting a loan from somewhere other than a bank may have sent shivers down the spine of a Boomer—it’s just too different to be trusted! But to a millennial raised with a smartphone in hand, moving away from banks is as natural as choosing Netflix over cable.

Alternative lenders are just part of that growing wave that’s changing the way many institutions operate.

And no, this isn’t one of those “millennials are killing the _____ industry!” articles that makes the rounds on Facebook every couple of weeks. Nobody is killing the banking industry—not anytime soon, and probably not ever.

Still, a lot of big bank executives are worried about where they’ll be in a few years. Which is why so many banks are now partnering with alternative lenders to create hybrid products. These hybrids combine easy accessibility with big-name security. (And guarantee the big banks get a slice of the profits previously enjoyed by their competition!)

The New Normal

With alternative lending companies proving they’re here to stay—and with trends showing that they’ll be an even bigger part of the lending landscape in the future, it’s time to stop thinking of them as alternative.

They’re lenders—same as banks. If you’re an entrepreneur or a small business owner in need of a lan, you should consider them based on their rates and charges just like you would consider any lender.

These companies may have started as options aimed at people who couldn’t secure big bank loans but that’s certainly no longer the case.

But What About Taxes?

Of course, no matter where you source your business loan, you’ll need to be sure to take its tax implications into account (and into your accounting).

You can usually deduct the interest you pay or accrue on business-related debts. That includes bank loans, next-gen loans, lines of credit, and other types of debt. The source doesn’t really make a difference to the IRS.

At SL Tax Centers, we can help you plan for taking on debt for your business and dealing with how that debt affects your taxes. We have 45 years of experience guiding thousands of people towards the best tax strategies for funding their businesses, and we’re ready to put that experience to work for you. If you’re thinking of getting a small business loan, get in touch with us and set up some time to talk!