8 Minutes Read.
We first wrote about key US-based Small Business Lenders in November 2017. In case you missed it, here it is: Overview of US SMB Lenders (Alternative Lenders). This new article is a great addition and update! Please enjoy!
Small Business Lending has dramatically evolved since the market crash of 2008. With the advent of fintech marketplace lending, the almost $700 Billion small business lending market has grown aggressively. These alternative lenders have helped small businesses flourish by smoothening the loan approval process and giving them greater access to cash. Nearly $663,000 was loaned to small businesses on average with maximum loans ranging from $13,000 to $1.2 Million. The rise in small business lenders has created more than 358,911 jobs and $12.6 Billion in wages.
Small Business Lending Trends to Follow
Percentage of Banks That Consider This Institution a Competitor for Small Business Lending
This illustrates that big banks understand the threat posed by the fintech lenders to their small business lending portfolio.
Banks and Fintech Companies Collaborate: Win-Win
Fintech and alt-lenders are characterized by their tech prowess, agility and cost effectiveness. These qualities allow them to underwrite even the smallest of loans. Their weakness is the high cost of customer acquisition, asset-liability mismatch and expensive financing. Banks and Credit Unions with their long-term low-cost deposit base and with deep community roots are a powerhouse in the same exact areas where alt-lenders lack. Combining the strengths of both fintechs and traditional lenders is a no brainer. The industry is witnessing collaboration in three ways:
- Banks invest in SMB alt-lenders: Goldman’s investment in NAV and Citigroup’s investment in BlueVine are the prime examples of big banks backing SMB lenders with hard cash.
- Banks partner with SMB lenders: OnDeck’s partnership with JP Morgan is the most famous and the earliest example of such an association. OnDeck basically provided the tech platform and JP Morgan had the captive small business audience.
- Banks partner with fintech vendors: Instead of passive investment and/or allowing access to third party lenders, many banks have moved towards partnering fintech partners like MonJa. There is no major upfront investment; no sharing of data with a competitor and the lender gets to monetize its small business relationships.
Emphasizing More on Transparency
Alt-lending is hyper-focused on transparency. So not only do you see a greater emphasis on transparent lending procedures but also the removal of complex fee add-ons and convoluted interest rate structures. The new alt-lenders are obsessed about Net Promoter Scores and transparency is the key for better rankings. Especially in a crowded alt-lending industry, transparency will be vital for building long term loyalty.
Speeding up the Funding
Online marketplaces are speeding up the funding process by simplifying the loan application and approval process. The increased use of AI and ML has automated the credit decisioning to a large extent. The reduction in waiting time (which can be weeks currently) is a key differentiator between lending platforms. Speed will act as a strong moat for lenders in the future.
Players in Small Business Lending
- Fundbox is a small business lender that was launched in 2013 and focuses on deep data analytics to offer revolving line of credit. It offers loan up to $100,000 and fees start at 4.66% of the draw amount for 12-week repayment. It has raised over $100 million capital from Khosla Ventures, General catalyst partners, and Spark capital.
- Noble Funding offers working capital business loans. Its loan offers starts from $50,000 and the APR can go as low as 9.99%. Its loan portfolio has crossed $4 billion in volume. It offers inventory loans, bank lite loans, asset backed loans and account receivable backed loans.
- SBG Funding offers flexible credit solutions tailored made to meet the credit requirements of small businesses. The loan offering ranges from $5,000 to $5,000,000 with the loan tenure ranging from 6 months to 5 years.
- Capify is an alternate lending platform that helps small businesses fund their business operations. It offers loan ranging from $5,000 to $1,000,000. Launched in 2002, Capify has consolidated its operations in the United States, UK, Australia and Canada under one umbrella brand. It offers merchant cash advance and business loans.
- National Funding is a pioneer in small business funding. Launched in 1999, it has evolved into a fintech lender with originations topping $ 2 billion. It offers small business loans and equipment financing and leasing. It has raised debt funding of $180 million in the last 3 years.
- BlueVine is a leading working capital financing provider for small businesses. BlueVine was founded in 2013. Since then it has met the working capital needs of more than 10,000 small business owners by originating loans over $1Billion. It offers flexible lines of credit up to $250,000 with rate as low as 4.8% and factoring invoice facilities up to $5 Million with rate as low as 0.25% per week. The company has raised almost $600 million in funding from investors.
- Headway Capital is an online lending platform that offers term loans, business cash advance, invoice factoring and business line of credit (up to $100,000) to fund small businesses working capital needs. Its repayment terms for business line of credit are from 12- 24 months.
- PayPal is now naturally extending to offer credit to small businesses. It specializes in merchant cash advance and instead of charging a fixed fee or an interest rate, it keeps a percentage of the revenue as fee. It offers loans up to 30% of annual PayPal sales up to a maximum of $125,000. PayPal had almost a 7 billion dollar loan portfolio at end of 2017. But it has recently partnered with a lender to remove the credit risk from its portfolio and focus on loan origination.
- Amazon Lending has a 3 billion dollar loan portfolio and originated over a billion dollar worth of loans in 2017. With a trillion dollar market capitalization, the company has the firepower to disrupt the entire ecosystem. With millions of merchants registered on its platform, it has a sticky captive audience. The loan is offered to only Amazon sellers and Amazon keeps the inventory as collateral for FBA (Fulfilled by Amazon) sellers. But it also offers annual rate of interest as low as 16% and with no origination and prepayment fees.
- Square Capital is now emerging as a serious player in the world of small business lending. With over $3 billion disbursed, 200,000 merchants served and loans ranging from $500-$100,000, the company is a force to reckon. The company has also partnered with eBay to offer sellers on eBay platform loans from Square Capital.
The small business alt-lending universe is set to expand multifold in the years ahead. Fintech lenders are dominating growing niches like e-commerce sellers and many payment fintech companies (like Paypal and Square) are tapping in-built audiences for their lending products. But traditional banks have woken up to this seismic shift in a trillion dollar industry. They are aggressively partnering up and investing in tech to keep abreast of fintech innovation. The biggest beneficiaries of this growth are the small business sellers. Left without funding during the 2008-09 financial crisis, the backbone of American economy are finally getting their day in the sun.
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