Online Lending For Small Business – Employee Amy Merritt prepares a flower arrangement at Flowers By Julia in Princeton, Illinois, USA on Monday, June 11, 2012. The National Federation of Independent Business (NFIB) is scheduled to release data on small business optimism on June 12. Photographer: Daniel Acker/Bloomberg via Getty Images
Earlier this month, the momentum behind the online lending industry was on display at LendIt — an industry gathering that didn’t exist four years ago but has grown from about 700 attendees last year to over 2,500 this year. What has become clear is that it is no longer a question of whether these disruptors will change the small business lending game, but how soon.
Online Lending For Small Business
Indeed, in his comments to LendIt attendees in New York, former Treasury Secretary Larry Summers predicted that online lenders could eventually capture more than 70% of the small business loan market. That may be an overly optimistic prediction, but one thing is clear: online lending is a welcome innovation in the small business sector.
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Dozens of new companies have jumped from FundBox to Square, joining long-term players like OnDeck, Lending Club and Funding Circle. At the same time, huge inflows from hedge funds and institutional investors created energy that caught the attention of longtime financial sector watchers.
Small business owners were hit the hardest in the Great Recession, in part because of their reliance on available credit. In the following years, the slowness of the general economic recovery was in many ways the result of these important job creators still not being able to easily access the capital they needed from their traditional sources – the banks.
Many banks today lend the same way they did 50 years ago, relying on expensive personal underwriting and mountains of paperwork. This makes small dollar loans uneconomical. However, loans under $250,000 are what most small businesses want. Add to that, the number of community banks—a critical source of small business loans—has been shrinking, from 14,000 in 1984 to fewer than 7,000 today.
As has often happened throughout our nation’s history, entrepreneurs with dozens of new companies are entering the lending space with a new approach. Much of the innovation behind these new startups is based on using technology to ensure a more accurate application and approval process. They use new algorithms to access and analyze more data from different sources about the borrower than traditional banking.
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Today, borrowers fill out an online application that usually takes 30-60 minutes. They get a response within hours and can be funded within days. This customer service appeals to frustrated small business owners who, on average, spent 26 hours in the loan process and waited weeks or even months for a response from the bank. Word is starting to spread. In a recent Federal Reserve survey, 18% of small business owners reported seeking capital online with an approval rate of 38%, compared to a 31% approval rate at large national banks.
Ease of use does not make an industry grow by itself, available capital does. Yes, it’s interesting that what really drives the growth of affordable capital for small business owners is affordable capital itself. Peer-to-peer capital has given way to hedge funds and income-seeking institutions, and a hungry financial sector ready to pool and distribute funding.
Despite the bright prospects, some troubling questions remain. What happens to all that new capital in a recession or when income is available elsewhere? Can new algorithms really predict which small businesses will succeed and which will fail? And the high cost of some of these new loans? Regulation is largely absent in this new industry. How can small businesses really know how to choose the right product and know how much they are paying?
How will traditional banks respond? Don’t count them yet. There are several factors that can really give established players a competitive edge. For example, while new online lenders spend significant amounts of money finding small business customers, traditional banks have thousands of such customers and have mountains of data about them.
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Banks are perfect partners in the new game, to say the least. They can connect customers to online platforms, share information about loan approval processes, and even put their capital to work as investors.
It goes without saying that transformation is coming, and it’s coming to an industry not known for it. As Summers noted last week, former Federal Reserve Chairman Paul Volcker once noted that the only useful innovation in finance in the past generation was the ATM.
All indications are that this transformation will only continue to accelerate. Meanwhile, one thing is clear – while investors may see gains, small businesses are likely to be the biggest winners.
Karen Mills is a senior fellow at Harvard Business School and the Harvard Kennedy School with a focus on competitiveness, entrepreneurship and innovation. She was a member of President Obama’s Cabinet, serving as Administrator of the US Small Business Administration from 2009 to 2013.
Ondeck Milestone: Small Business Online Lending Tops $10 Billion
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The Rise of Online Lending is a new entry in Intuit’s New Economy Dispatch series.
It was released alongside the announcement that Intuit and Fundbox are collaborating on a new product that gives small businesses a simple way to fix their cash flow by advancing payments on outstanding invoices in QuickBooks.
Using QuickBooks data and requiring no credit checks or paperwork, this new solution offers faster funding, lowers costs and puts more money directly into the hands of small businesses.
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As the report’s chart below shows, small business lending has been hammered. The bottom line is that banks are less interested in lending to small businesses than in the past.
There are a number of reasons for this – see the report for details – but a big one is due to banking regulation since the Great Recession, it just isn’t as profitable for banks to lend to small businesses using traditional methods.
Filling the gap are online providers of various types. Banks are also starting to offer loan products online or in partnership with new online lenders. This, as you can see in the report chart below (click to enlarge), is expected to result in strong growth in online lending to small businesses in the US. growth or to keep your business on solid footing during an unexpected downturn – one thing to consider is whether you need to bring collateral to the table.
The collateral acts as collateral for the lender in case you default on the loan and are unable to repay it for any reason. If your business lacks assets that can be pledged as collateral, finding an unsecured business loan may be your top priority.
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Fortunately, it is possible to find commercial loans that do not require collateral as a condition of approval. Before applying for one of these loans, it’s important to do your research so you know what to expect.
The first step in getting an unsecured business loan is knowing what options are available. Unsecured loans are offered by a variety of lenders, but the loan terms and approval requirements can be very different.
The Small Business Administration (SBA) guarantees loans to small business owners through its network of partner lenders. There are several SBA loan programs you can consider when you need working capital, and the 7(a) program is one of the most popular. The SBA 7(a) program requires no collateral for loans up to $25,000, which is helpful if you only need to borrow a smaller amount of money.
For loans over $350,000, the SBA requires lenders to guarantee loans to the maximum extent possible, up to the loan amount. If you don’t have enough business assets to fully secure the loan, lenders can use the personal real estate you own as collateral. However, having no collateral is not a bar to getting a 7(a) loan if you meet the other requirements.
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In addition to 7(a) loans, the SBA offers disaster relief loans to companies that suffer losses related to natural disasters and economic downturns. So, for example, a business that has suffered losses due to a government shutdown mandate can apply for an economic damage loan.
The down payment for an SBA loan can be between 10% and 30%, but it will depend on the loan and the specific borrower.
Similar to 7(a) loans, disaster loans under $25,000 do not require collateral. If you borrow more than this amount, collateral is expected, but again, the SBA will not deny a loan based solely on a lack of collateral.
Online and alternative lenders can offer a variety of loans with no collateral requirements
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