Innovating with Credit: New Funding Avenues

The world of business financing is undergoing a profound transformation as traditional banks retreat from smaller-scale lending. Driven by higher interest rates, stricter regulations, and a strategic focus on large corporate clients, many banks now prioritize low-risk portfolios over the nuanced needs of small and mid-sized enterprises. This shift has created a funding gap that innovative credit providers are racing to fill, offering dynamic solutions that combine speed, flexibility, and inclusivity.

In this article, we explore how new funding avenues—from private credit funds to embedded lenders—are reshaping access to capital, unlocking growth opportunities for underbanked businesses, gig workers, and credit-invisible consumers alike.

The Limitations of Traditional Lending

For decades, small business owners have relied on bank loans as their primary source of capital. Yet approval rates for bank small business loans hover between just 14.3% and 20.1%, compared with 26.1% for alternative lenders. In 2018 alone, the SME Finance Forum estimated a staggering $5 trillion global shortfall between SME credit needs and capital allocated by banks.

Moreover, about one in five U.S. adults is considered credit invisible or unscorable, excluded from mainstream lending due to thin files or subprime histories. Many borrowers — especially young entrepreneurs, immigrants, and gig-economy participants — are locked out by static credit checks and outdated scoring, unable to demonstrate their real-time creditworthiness.

Emerging Alternative Funding Models

In response to growing demand, a diverse ecosystem of nonbank lenders has emerged, leveraging technology, creative structures, and unconventional underwriting methods.

• Private Credit Funds: Offering high loan-to-value ratios, bespoke covenants, and rapid approvals, vital for mid-market deals and acquisitions.
• Fintech & Online Lenders: Using AI-powered platforms and alternative data to streamline working capital, invoice financing, and merchant cash advances.
• Peer-to-Peer (P2P) Lending: Connecting institutional and individual investors directly with borrowers, providing transparency and competitive rates.
• Revenue-Based Financing (RBF): Tying repayments to revenue, popular with SaaS, retail, and subscription businesses seeking non-dilutive capital.
• Asset-Based Lending (ABL): Loans secured by receivables, inventory, or equipment, ideal for companies with strong tangible assets.
• Invoice Factoring & Supply Chain Finance: Early liquidity via receivable sales, critical for long payment-cycle industries like manufacturing and healthcare.
• Mezzanine Financing: A hybrid of debt and equity used in expansions and acquisitions, offering higher returns for greater risk.

Between 2019 and 2020, U.S. digital lending volumes jumped by 124% for business loans, with $72.27 billion originated outside of China, signaling a seismic shift toward nontraditional credit solutions.

Alternative Data and Technology Driving Credit Innovation

Lenders are increasingly turning to nonconventional information—bank transactions, payroll records, utility and telecom payments, rental histories, gig economy earnings, and BNPL activity—to paint a richer picture of borrower risk. Yet only 43% of lenders actively supplement credit scores with these insights, despite 90% believing alternative data could expand their addressable market.

Institutions that embrace next-generation underwriting see tangible benefits. One digital lender, integrating Plaid’s account data, approved 29% more loans at consistent risk levels. Others using real-time cash flow analyses reported 30% lower delinquency rates on select products. In all, an estimated 19 million additional Americans could qualify for credit if evaluated with these modern techniques.

Market Growth and Investor Perspectives

The global private credit market reached approximately $1.7 trillion in 2025 and is projected to swell to $2.8 trillion as institutional investors seek diversification beyond equities and bonds. Alternative lending outside China grew 51% year-over-year in 2020, driving a geographic redistribution of market leadership toward the U.S. and Europe.

For investors, these vehicles serve as a potent hedge against public market volatility, delivering stable yield and portfolio diversification. Meanwhile, borrower demand for flexible, tailored terms continues to accelerate, reinforcing the sector’s growth trajectory.

Challenges and the Road Ahead

Adopting these novel approaches is not without hurdles. Lenders must navigate compliance complexities, ensure data privacy and security, and integrate multiple platforms seamlessly. Still, 71% of financial institutions plan to partner with third-party vendors or open banking providers to streamline these processes.

• Regulatory complexity can slow rollout of innovative products.
• Data privacy and security standards require robust governance.
• Integrating multiple funding sources demands scalable technology stacks.

Despite these obstacles, market participants remain optimistic, recognizing that technological collaboration and regulatory evolution will pave the way for broader adoption.

The Future of Embedded Finance and Open Banking

Looking forward, real-time underwriting and funding within software platforms will blur the lines between operations and financing. Small businesses will access capital directly through their accounting, point-of-sale, or payment processing systems via embedded finance in everyday software, eliminating paperwork and accelerating growth initiatives.

Furthermore, open banking standards will enable continuous risk monitoring via live business data feeds, replacing periodic credit reviews with dynamic scoring that adapts to each borrower’s evolving circumstances. This shift promises greater resilience against economic shocks and more equitable access to credit.

By weaving together private credit, fintech solutions, asset-based structures, and mezzanine financing, the industry is crafting a diversified ecosystem that responds to varying capital needs. Innovation in credit assessment and funding models is not merely a fleeting trend—it is a fundamental redesign of how capital flows, empowering businesses and individuals to seize new opportunities in an ever-changing economy.