Tuesday, August 16

Online Lenders are Changing the Small Business Lending Market for the Better

While banks are still the leader in providing outside capital for small businesses, there have always been alternative forms of loan capital available, including credit unions, Community Development Financial Institutions (CDFIs), merchant cash advances, equipment leasing, and factoring products.

This segment of the market has always been small compared to the $700 billion in small business bank credit assets. But Forbes discovered that since the onset of the financial crisis, and particularly during the economic recovery, there has been significant growth in innovative, online alternative funding for small businesses.

There has been a 175% growth in the outstanding portfolio balance of online lenders each year, compared to a 3% decline in the traditional banking sector.

As they grow, these online alternatives have the potential to fundamentally change the way small businesses access capital, creating greater competition, price transparency, and a better customer experience.

One of the factors that draws small businesses to the online lenders is the relatively high rate of returns available. Traditional bank loans may yield a return of 5 – 7%, but many alternative lending platforms charge yields ranging from 30 – 120% of the loan value, depending on the size, term duration, and risk profile of the loan.

These lenders have changed the world of small business lending, specifically in terms of convenience and simplicity. For instance, online lenders offer online and mobile applications that can be completed in under 30 minutes, which compares to the average of 25 hours small businesses spend on average filling out paperwork for conventional banks.

After filling out the online application, owners can be approved in a matter of hours and have the money in their account in a matter of days, whereas small business owners may not be approved for several weeks with the traditional business model.

“With online lending, the speed to market is much faster than any traditional small bank loan. We can have someone pre approved within hours and have money wired to their business account in as few as 3 days. The majority of companies that offer this type of lending allow you to not need to include any traditional personal guarantees in order to receive capital from their company. The documentation process is also very elementary compared to the traditional process,” says Kevin Borth, Financial Advisor, Pay It Forward Financial.

For now, the online small business lending market is largely unregulated at the federal level. Otherwise, the SEC partially regulates peer-to-peer lending, and state banking laws apply. There is still disagreement as to how exactly these lenders should be regulated, but the market is still only in its infancy.

The financial crisis significantly changed the small business lending in the United States, for both the owners and entrepreneurs, and the institutions that lend to them. Lending through traditional sources still hasn’t returned to pre-recession levels, but this has allowed the online lending market to emerge and fill the gaps.

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