Xan Myburgh is the CEO + Co-Founder of Backd Business Funding, a leading alternative financing solution.
People often assume that as fintech and alternative financing grow, traditional banks will become less relevant. In reality, the two serve different but complementary roles in the financial ecosystem. Instead of replacing banks, alternative lenders fill in the gaps that traditional financing can’t address. Instead of viewing each other as competition, banks and alternative lenders can work together to provide businesses with a wider range of financing solutions.
For small and mid-sized businesses, the decision to use a bank or an alternative lender often comes down to timing. Banks understandably want to see a history of success before they lend money, so they focus on things like recent profitability, collateral and debt service coverage. That’s great for businesses that are stable and well-established—but what about those in the process of rapid growth? A company that’s expanding quickly might not have years of profits to show, even though it’s on the right track. That’s where alternative lenders step in.
Alternative lenders are less concerned with past profits and more interested in the bigger picture. Does the company have a solid business model? Are the margins strong? Is rapid growth making profitability look worse than it actually is? If the answer to those questions is yes, an alternative lender may be willing to fund the business. The goal isn’t to replace traditional financing but to help businesses get through the high-growth phase until they’re stable enough to qualify for lower-cost bank loans. Once they mature, many of these companies can transition to traditional financing.
Complementary, Not Competitive
The alternative and traditional finance sectors can work together to serve businesses at different points in their life cycle. Businesses don’t have to choose one or the other—they can use both. A company may have a traditional term loan, a commercial real estate loan or an overdraft facility from a bank while using alternative financing for working capital or growth initiatives at the same time.
Speed is one of the biggest advantages alternative lenders have over banks. Banks have to follow strict regulations, which slows down the loan approval process. That’s fine for businesses that can wait, but what about those that need cash now? Whether it’s to take advantage of a big opportunity or to smooth out cash flow, alternative financing can be the answer. Banks, in turn, benefit from these partnerships by maintaining their relationships with clients and strengthening their balance sheets when those funds flow back into business accounts.
Challenges To Collaboration
Even though banks and alternative lenders can work well together, the process needs to be approached with care. Banks have to navigate legal and regulatory red tape before they can partner with alternative lenders. Every agreement has to go through multiple layers of approval, which can slow things down.
Clients also need to show up informed. Many businesses don’t realize which type of financing is right for them. High-growth startups can waste months applying for bank loans, only to get rejected because they don’t have years of profitability to show. Meanwhile, well-established businesses sometimes opt for high-cost alternative financing when they could qualify for a cheaper bank loan. It’s important to know where you are in your business journey and choose the financing that makes the most sense.
The Future Of Financial Services
Banks and alternative lenders are already teaming up in different ways. Some have simple referral agreements, while others have full-blown partnerships or even mergers. As financial services continue to evolve, expect to see an increasing number of banks and alternative lenders working together. The overall trend is clear: The future of finance lies in banks and alternative lenders working side by side. More collaboration means better options for businesses.
At the end of the day, the smartest businesses don’t limit themselves to just one type of financing. They use what makes the most sense for their current stage of growth. The best strategy? Know your options and use them wisely.
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