Naturally, with an economy that ebbs and flows, the small business lending space is constantly in flux as well. In recent years, as banks closed their doors to small business owners, a variety of lenders stepped in to fill their place, paving the way for alternative lending solutions. These new solutions have slowly transformed the lending space, making it easier for small businesses to receive financing and manage their cash flow. But, as the economy continues to improve and the industry continues to grow, what other changes can we expect to see?
The next time you’re looking for a small business loan, keep these 3 trends transforming the small business lending space in mind.
1. Unexpected Competitors in the Space
In an effort to provide an alternative to tight-fisted banks, it has become increasingly popular for technology companies such as OnDeck and Kabbage to provide small business loans with the promises of saying yes more often and giving small business owners instant cash.
With the major successes these tech companies have seen, it is then an interesting turn of events that a selection of payment platform companies recently moved in a completely opposite direction. In the fall of 2013, PayPal announced a Working Capital program, where repayments are made based on taking a percentage of future sales – essentially, a merchant cash advance program.
This move into the MCA space, along with similar moves made by other payment platforms such as Square, shows a bold turn away from the norm. PayPal’s program alone provided $140 million in capital to businesses between its inception and July of 2014 and recently announced they will expand the program to the UK. With numbers like that, it shouldn’t come as a surprise that Square followed in PayPal’s footsteps, and that more companies will inevitably follow. With a recent hire of a former Visa exec, it seems Amazon is also ready to ramp up their lending game. If you are a customer of PayPal or Square, or a sell on Amazon, this is exciting news for your future working capital needs.
2. Using the Web to Vet Borrowers
It’s worth noting how these companies evaluate business owners. PayPal and Square, for example, use business owners’ accounts hosted through the platforms to instantly assess their cash flow. They’re not relying on the credit score alone. Nor are other alternative lenders (like OnDeck and Kabbage), who are using the internet to quickly access data and insights into a company’s standing.
Because of this, 2014 has seen (and will continue to see) an increase in the value of social proof. Lenders are embracing social media, online reviews, site traffic, and more to evaluate potential borrowers, which often provide just as detailed of a story about a business owner’s current standings as a credit score might.
3. Borrowers Empowered by Technology
And if lenders are looking to social for evidence, so are borrowers.
As the alternative lending industry continues to boom, these lenders are having to get more competitive with their rates, repayment periods, and more. Why? It's becoming easier for borrowers to apply for and shop loans. Competitors have an unprecedented focus on their inbound marketing strategies – they have to make sure their names are seen in search engines, which means embracing social media and online reviews. Technology has put the power in the hands of the borrowers, as they can find everything they need right online to ensure they’re getting the best possible rates and working with lenders who follow best practices. Not to mention, “fast funding” is now a real possibility. With lenders and loan applications moving online, business owners can get access to cash in days if need be.
Beyond vetting lenders and putting loan processes online, technology has brought on the emergence of crowdfunding, a popular option for businesses (particularly small ones) who need funding but are struggling to attain bank credit.
Crowdfunding allows individual investors to pool their money online on behalf of a company or project, often in increments of just a few dollars at a time. Kickstarter, for example, has successfully raised $1 billion in financing for new projects and businesses. The drawback? Crowdfunding services are often an all-or-nothing deal. If a business doesn’t meet its pledge goal, it doesn’t receive any funding at all. Taking another look at Kickstarter, since its inception over 68,000 projects have received their funding, but over 95,000 were actually unsuccessful and received no funding at all.
It will be interesting to see how the market unfolds with all these new players on the roster. All of these funding models put cash in your hands as quickly as possible. Gone are the days of waiting around for six months for loan approvals from the single institution in town. With the help of the web, you now have limitless options at your fingertips and your data can be processed in days – minutes, even – so you can get your hands on the money you need and quickly, even if you have below average credit scores. We’ve entered into an era where lending is secure, it connects people to the money they need, and it does it all at the click of a button.