Rising Interest Rates and the Shift to Alternative Lenders

By Taimour Zaman

The lending landscape has transformed dramatically over the past few years, and if you’re a business owner or CFO, you’ve probably felt it firsthand. Traditional bank financing—once the go-to option for growth capital—has become increasingly difficult to access. The culprit? Rising interest rates and a fundamental shift in how businesses secure funding.

Let me walk you through what’s happening and why alternative lenders have become the lifeline for so many companies navigating today’s financial environment.

The Interest Rate Shock That Changed Everything

The numbers tell a stark story. Between 2022 and 2024, the U.S. Federal Reserve implemented the most aggressive rate hikes we’ve seen since the 1980s. For context, the federal funds rate went from near zero to over 5% in less than 2 years—a pace that caught many businesses off guard.

What does this mean in practical terms? Bank loans that might have cost you 4% three years ago now carry rates of 8% or higher. For small and mid-sized businesses already operating on tight margins, that difference can make or break a growth initiative or acquisition plan.

But here’s where it gets more challenging: it’s not just about higher rates. Banks have simultaneously tightened their lending standards, demanding more substantial collateral, higher credit scores, and more extensive documentation. The traditional path to business capital has narrowed considerably, leaving many viable companies searching for alternatives.

Enter Alternative Lenders: Filling the Gap

This is where the story gets interesting. As banks pulled back, a new generation of lenders stepped forward—and they’ve been growing at a remarkable pace.

Private credit lenders, fintech platforms, and specialized debt funds have evolved from niche players to mainstream financing sources. By 2023, approximately 85% of private equity deal financings were funded by non-bank lenders rather than traditional banks. That’s not a typo—the majority of middle-market deals are now happening outside the conventional banking system.

The global private credit market has ballooned to roughly $1.7 trillion in assets under management, surpassing the size of traditional high-yield bond and leveraged loan markets. In the United States alone, this sector grew from just $46 billion in 2000 to about $1 trillion in 2023. That’s exponential growth driven by real market demand.

Why Businesses Are Choosing Alternative Financing

I’ve worked with dozens of companies making this transition, and the reasons are remarkably consistent:

• Speed matters. Traditional bank loans can take months to approve. Alternative lenders often provide decisions in weeks—sometimes days. When you’re trying to capitalize on a time-sensitive opportunity or need bridge financing, that responsiveness is invaluable.
• Flexibility is king. Banks operate with standardized products and rigid criteria. Alternative lenders can structure creative solutions tailored to your specific situation—revenue-based financing, asset-backed loans, mezzanine debt, or hybrid instruments that traditional banks simply won’t offer.
• Access for non-traditional borrowers. If your business doesn’t fit the perfect bank profile—maybe you’re in a capital-intensive sector like technology or healthcare, or you’re experiencing rapid growth that makes your financials look unconventional—alternative lenders are often more willing to understand your unique story and circumstances.
• Relationship-driven approach. Many alternative lenders act more like partners than institutions. They’re willing to work through challenges and adjust terms as your business evolves, rather than enforcing one-size-fits-all covenants.

Who’s Driving This Alternative Lending Boom?

The alternative lending ecosystem is diverse and sophisticated:

• Private debt funds backed by institutional investors are providing senior and subordinated loans to mid-market companies. These funds have dry powder to deploy and are actively seeking quality borrowers.
• Fintech lenders leverage technology and alternative data to make faster credit decisions, often serving businesses that banks overlook due to limited credit history or non-traditional business models.
• Direct lenders are stepping into the gap left by banks in leveraged buyouts, recapitalizations, and growth financing—particularly for companies with $10 million to $500 million in revenue.
• Asset-based lenders focus on collateral value rather than credit scores alone, making them ideal for businesses with substantial assets but unconventional cash flow patterns.

The Regulatory Factor You Should Understand

There’s another dynamic at play that’s less visible but equally important: banks face increasingly stringent capital requirements and regulatory oversight post-2008 financial crisis. These regulations make certain types of lending—particularly to mid-market and higher-risk borrowers—less attractive from a capital efficiency standpoint.

Alternative lenders operate under different regulatory frameworks, giving them more flexibility to take on these relationships. This isn’t about circumventing safety measures; it’s about specialized lenders with appropriate risk appetites filling market segments that banks can no longer serve efficiently.

What This Means for Your Business

If you’re exploring financing options in 2025, here’s what you should know:

• Don’t assume banks are your only option. The alternative lending market is mature, competitive, and often offers better terms for certain situations.
• Compare total cost, not just interest rates. Alternative lenders might offer higher nominal rates but fewer fees, faster funding, and more flexible terms, reducing your overall cost of capital.
• Consider your growth trajectory. If you’re scaling quickly or operating in a dynamic industry, the flexibility of alternative financing might be worth more than marginally lower rates from a bank with rigid covenants.
• Build relationships before you need them. The best time to explore alternative lenders is before you’re in urgent need. Established relationships lead to better terms and faster execution when opportunities arise.

Looking Ahead: A Permanent Shift

This isn’t a temporary trend that will reverse when interest rates eventually decline. The infrastructure, expertise, and capital pools backing alternative lenders are here to stay. We’re witnessing a permanent diversification of the business financing ecosystem—one that ultimately provides more options and better outcomes for borrowers who understand how to navigate it.

For businesses willing to look beyond traditional banking, today’s environment offers unprecedented access to creative financing solutions. The key is understanding your options, identifying lenders that align with your needs, and structuring deals that support your long-term growth objectives.

Ready to Explore Your Financing Options?

Navigating the alternative lending landscape requires expertise and established relationships with the right lenders. At AltFunds Global, we specialize in connecting businesses with optimal financing solutions tailored to their unique circumstances.

👉 Want tailored guidance? Schedule your strategy call now.

Let’s find the funding solution that accelerates your growth—without the constraints of traditional banking.