7 ways alternative lenders can help community banks reach more customers

From startups to businesses facing seasonal or slower paying customers, to established companies looking to grow—businesses today are increasingly facing cash flow challenges..Working capital levels for large companies are reaching near-record highs with ~$700B in trapped liquidity (up 40 percent from pre-pandemic levels) and companies experiencing a 2.4-day increase in cash conversion according to JP Morgan’s Working Capital Index, as just one example. And 88 percent of small businesses were expected to experience cash flow disruptions in 2025, according to a Relay report. Local banks play a critical role in helping businesses gain access to capital. But what about when the business does not meet minimum credit requirements needed to secure a working capital loan, yet is a good fit for the bank in other areas? Perhaps the business doesn’t yet have substantial financial history or consistent cash flow. Banks are increasingly partnering with alternative lenders to serve business clients who don’t currently meet traditional lending requirements but may qualify in the near future. These flexible working capital providers offer alternatives such as purchase order or accounts receivable financing, asset-based lending, or leasing. Meanwhile, the bank retains the depository and treasury management relationship, referring the client to the alternative lender until the business becomes bankable. How might banks benefit from working with alternative lenders to help clients grow into traditional business borrowers? The following are seven considerations and benefits of partnering with working capital or alternative lenders, and how these partnerships can help banks to:Preserve client relationships through referral partnerships: Working with an alternative lender can help banks to keep customers who don’t meet underwriting criteria (those that might have thin credit, short history, high concentration) versus declining them outright. The bank can maintain depository and treasury relationships while referring any working capital loan to an alternative lender. Expand to serve underserved clients: The bank can also broaden its reach to address near-prime/non-traditional borrowers who don’t meet underwriting qualifications. This can include working with startups, seasonal businesses, and companies with more volatile cash flow; clients who are too small for conventional lending yet don’t meet SBA requirements, those who might be over leveraged, cannot meet debt service coverage thresholds, or need a few more quarters of positive financial results. Address the full customer lifecycle strategy: Banks can work with alternative lenders on transactions that include provisions for the client to return to the bank for traditional lending options when bankable. This can be done by the alternative lender including terms in their loan agreement to waive exit fees before the contract with the alternative lender is up. Offer flexible alternatives: For many businesses, alternative lenders can offer a flexible alternative to stabilize cash flow, navigate seasonality, or pursue new opportunities, over traditional bank lending. For example, alternative lenders may not require restrictive loan covenants.Speed up and simplify access to capital: Where traditional financing can take months to approve, working capital financing may be able to be completed in a few weeks. For businesses seeking faster underwriting and funding decisions, working capital can require less documentation and speed processes, offering a bridge in funding when needed. Diversify risk exposure: Banks may seek to limit loan exposure to certain industries. Banks may be hesitant to lend to companies in industries where they are not comfortable or lack expertise. Working with partners in alternative lending can help banks to offer solutions to prospects operating in industries they currently wish to avoid.Prepare business clients for traditional lending: The nature of working capital may help businesses to build greater cash flow discipline. Reporting requirements are often more robust than with traditional lenders, and alternative lenders often require dominion of funds, automatically applying payments the client receives to their line of credit. This encourages business owners to only draw on their line of credit when needed (versus having funds sitting idly by), translating to the average loan balance and costs to finance typically being less. From borrowing base certificates to field exams, working capital providers also often require similar documentation from borrowers as banks. This helps to make it second nature, and easier when the business client returns to the bank that initially referred them. The decision to work with an alternative lending partner is one that needs to be weighed by the bank. Some important factors to consider are: the reputation and history of the alternative financing provider; its transparency in providing clear, understandable terms to businesses and the referring financial institutions, the ability of business clients to secure financing and, ultimately, return to the referring bank for a traditional working capital loan at a later date. Steve Tomasello, president of Oxford Commercial Finance, draws on 33 years in financial services. His company works with banks and others on business financing to help small-to-medium businesses navigate financial challenges and growth opportunities. He can be reached at stomasello@oxfordbank.bank.