Why You Should Consider Online Lenders To Finance Your Business
If you are a small business owner looking for a business loan, you should consider an online lender. Although these creditors – companies like OnDeck, Lending Club, Prosper Loans Marketplace – currently represent only a tiny fraction of all small business financing, they are currently the fastest growing source of small business debt. .
So explains Karen Mills, former head of the Small Business Administration and now Senior Fellow at Harvard Business School (PDF).
In fact, the Federal Reserve Bank of New York found that 20% of small businesses looking to borrow money applied to online lenders.
Although loans from online lenders are often more expensive than other forms of small business credit (interest rates are similar to credit card loans), small business owners should consider online lenders as a source of funding for several reasons:
First, many online lenders offer products that better match the financial needs of small business owners than many products offered by banks.
Many small business owners today need small amounts of cash to deal with short-term cash pressures rather than term loans to finance large purchases.
Analysis by consultancy Oliver Wyman shows (PDF) that many online lenders focus on smaller, shorter-term loans and offer accounts receivable cash advances, which is the type of credit many small business owners with “lumpy” cash flows need to match their cash inflows and outflows.
Second, online lenders offer easy and simple loan applications.
Small business owners are often time and cash constrained and need access to credit without spending hours on paperwork. Online lenders generally have much simpler application processes than banks and are much faster at making loan decisions. Instead of taking a few weeks to make a loan decision, online lenders usually only take a few hours.
A survey of small business owners using its services conducted by online lender OnDeck found that many small business owners had turned to online lenders after dismissing traditional loans as “too difficult”. or “too slow”.
Third, you might be more likely to get a loan from an online lender than from a bank. Online lenders sometimes find that borrowers rejected by banks are creditworthy because they rate small businesses differently.
Rather than just focusing on criteria employed by banks, some online lenders use complex algorithms that include information from online social networks to predict borrowers’ chances of repaying their debts. Others rely on the preferences of individuals seeking to invest their savings directly in other people’s businesses.
These algorithms and preferences sometimes give different results than bank loan officers’ decisions.
Fourth, you may soon have no choice but to look for an alternative to a bank loan.
The high costs and low profits of small business lending have caused many banks to exit the small business lending business over the past twenty years. Between 1995 and 2014, loans under $1 million fell from 33% of all commercial and industrial loans to 21%.
In addition, community banks – those most likely to lend to small businesses – have disappeared. Since the financial crisis, the Federal Reserve Bank of Richmond has found that their numbers have fallen by more than 40%.
The emergence of equity crowdfunding will likely increase the amount of external equity that small business owners raise. However, loans are a better source of financing than equity for some small businesses.
As a result, many small businesses that have historically been financed by bank loans will continue to be financed by debt. Some of this debt will come from online lenders.