Just twenty-five years ago, the landscape for business financing was much different than it is today. Bank loans were easier to get, to an extent, and the digital revolution was yet to really kick into full force, so the number of entrepreneurial startups was a bit smaller, since most operational models were more-or-less brick-and-mortar operations. Private investment was common, and some modern innovations happened through traditional communities and social networks, but the main methods of financing a new company were pretty simple.
Traditional Lending and Investment
Apart from bank loans and private investments, the business economy of the late 20th century also encouraged companies to work toward public stock offerings. The Small Business Administration existed, and provided many of the same services they do today, including guaranteed loans for entrepreneurs.
These options basically made for a single traditional growth model for companies. You started with the money you could raise from friends, family, and other business contacts. When you needed more business financing, you presented your plan to the bank, and if it was sound, they gave you a loan. If you did not quite qualify for the bank loan, then there was the SBA, and after a certain point, you had to choose between reinvesting your own profits, continuing to make loans, or making a public offering so that the company could gain the kind of rapid expansion that stock financing offered.
The Digital Revolution
Online lending and banking started to change this toward the end of the 1990s and in the early 2000s. As it became easier for companies to operate solely online, business financing moved with the trend. Companies that provided secure escrow transactions, payment gateways, and other services began to fold in short-term financing options, and business credit cards began to become more accessible than they previously had been. That meant that they started playing a larger role in funding new companies, too.
The credit crunch that happened in the midst of the Great Recession accelerated this process, as did the smartphone revolution. The fact that both were happening at once resulted in a fundamental paradigm shift. Suddenly, banking institutions saw small business as too risky to fund, and companies were left with a hole in their business financing plans. Alternative lenders, many of them the same players that had previously catered to exclusively digital businesses, began to grow and flourish. To compete, programs like the Small Business Administration have had to streamline their loan approval process, and the result has been greater access to credit and diversification of the marketplace for entrepreneurs.
It is true that some of these new options can carry higher interest rates than traditional loans, but with the enhanced access and faster turnaround times, the responsiveness gained often outweighs the financial costs. The result is a more diverse marketplace, with better access to business financing for more companies.