The small business financing landscape is gradually splitting into two distinct worlds. Recent data from the Federal Reserve’s 2025 Small Business Credit Survey reveals a striking reality: as credit risk increases, businesses migrate from traditional banks to alternative lenders—and the gap is massive.
The Current Divide
With an understanding that many businesses apply to multiple lenders for funding, the data reveals distinct patterns by credit risk. Low-risk businesses heavily favor traditional banks and credit unions, while high-risk businesses increasingly turn to alternative lenders such as online platforms, finance companies, and community development financial institutions (CDFIs). The difference is striking: high-risk firms are 45 percentage points more likely to pursue alternative lending than their low-risk counterparts.
This isn’t about preference; it’s about access. When traditional doors close, entrepreneurs find other ways to secure growth funding.
Why This Matters
This shift fundamentally changes business economics. Alternative lenders often charge higher rates and offer different terms than traditional banks. What starts as a credit challenge can become a growth constraint, as higher financing costs eat into cash flow that could otherwise fuel expansion.
Taking Action
First, objectively assess your credit profile—both business and personal scores. Many business owners don’t realize which risk category they fall into and equally important, how personal credit can affect their business’s attractiveness to lenders. Second, if you’re in the high-risk category, develop a systematic plan to improve your creditworthiness long before you need to approach lenders. Consider working with a business consultant who is an expert in getting businesses lender-ready.
The financing divide is real, but it doesn’t have to be permanent.