Why Millennials Are Flocking to Alternative Funding

By Stephen Sheinbaum

America’s youngest business owners are an optimistic lot. A survey by Bank of America showed that 74 percent of entrepreneurs age 18 to 34 expect the national economy to be better in 2015 than it was in 2014, compared with 35 percent of Baby Boomer business owners.

Young entrepreneurs also have a different view of business finance. Fourteen percent of Millennial small business owners indicated that they had gotten funding from a peer-to-peer network and 11 percent had used a microlender. Only 41 percent of these young entrepreneurs said they would try a bank first for funding.

It isn’t hard to see some reasons why Millennials would favor alternative lending. If they are homeowners (and fewer young Americans are), they don’t have enough equity built up to qualify for a bank’s home equity loan, a classic way of financing a business. Bank of America found that only 10 percent of Millennials had funded their business through a home equity loan or personal debt, compared to 18 percent of Gen-Xers and 25 percent of Boomers.

Younger people also have had less time to build up the credit history needed for a traditional lending decision, and the scores they have tend to be far lower than that of older people. According to Credit Karma, 18 to 34 year olds have an average score of around 630, compared with 696 for people 55 and older.

Growing Up on the Internet

But nest eggs and credit scores aren’t the only reason why Millennials are choosing alternative funding. It’s the method that best matches with how they approach so many things in their lives.

First, of course, alternative funding lives on the Internet, not in a brick-covered bank branch that might not even be in their neighborhood. Millennials have grown up with the notion that if there is something worth finding, it can be found on the Internet. A Google search for “funding for my business” is likely to bring up alternative lenders in the top results, not traditional banks.

Millennials aren’t put off by doing business with a business they know only through the Internet. (And if they need support, they know they can get it from a chat window that is likely to be staffed by someone who is relying on a database of information for the correct answer.)

A Need for Speed

Then there is the speed of alternative finance. With a few quick keystrokes, Millennials have something to listen to or to read. With a few swipes of a fingertip they can have a car service at their curb. The thought of waiting two months or more to hear back from a bank whether it will approve them for funding--or whether they’ve submitted all the paperwork--simply isn’t in their worldview.

Crowdfunding and peer-to-peer lending sites like Kickstarter and Indiegogo enable these young entrepreneurs to see within days whether their business idea resonates with funders. Indeed, Kickstarter says that its most successful campaigns have been funded in 30 days or less.

Alternative funding sites like the one I founded are faster still. Most will tell a prospective borrower whether he or she is pre-approved for funding in a few minutes--about the same amount of time as it takes to type and send a text message. Alternative funding sites have made it fast and easy for borrowers to submit all the documents needed for final funding approval, too; the process is second nature for a generation that grew up knowing how to attach a PDF to an email.

Multiple Choices

But there’s something else on the horizon that is likely to make alternative funding even more appealing to Millennials: choice. Funders are readying systems that will make it possible for these young borrowers to get several options for extra capital with just one application.

Just as they can submit a few bits of information on where and when they want to fly and get a screen full of possible flights, Millennials will be able to use these new funding marketplaces to see several ways of getting their businesses to where they want them to be--including short-term loans and loans backed by guarantees from the SBA.

Barbara Corcoran, who turned a $1,000 loan into a billion-dollar real estate business before becoming a mentor to new entrepreneurs, told Bloomberg News that small businesses shouldn’t “even bother” trying for a business loan at a bank.

As business wisdom goes, I think she’s right on the money.