The dangers of online loan? Don’t believe the hype

The small to medium business has only 27 days of cash in reserve. One in four is less than 13 days old. Even those who are thriving face cash shortages that can hamper their growth. The solution is simple: an immediate infusion of cash to set the record straight. For some businesses, this means a small loan to make the next pay. Or a loan of equipment to repair a critical part of the machine. But when time is running out and a bank loan takes weeks or even months to get approved, who should a small business owner turn to?

According to a study conducted by NPD Analytics, online lending platforms have become one of the main options for small and medium-sized enterprises (SMEs) to access capital. The study found that between 2015 and 2017, five of the country’s largest online small business lending platforms facilitated $ 10 billion in loans, generating $ 37.7 billion in gross economic output. Yet some policymakers and others in the mainstream banking world continue to claim that online lending is the Far Far West, a land without law which:

  • has no transparency
  • is predatory and untrustworthy
  • does not have the best interests of small business in mind.

But $ 10 billion in loans is a testament to the ubiquity and importance of online lending. Before you believe the hype about the “dangers” of this type of financing, here are a few things to consider.

A few bad apples don’t spoil the bunch

It’s true, there was some online loan companies in the news who have been sued / accused of offering interest rates to borrowers who exceed the legal limit. Does this mean that the entire online lending landscape is blemished? Does this indicate that all online lenders and fintech companies are doing nothing right and need to be heavily regulated?

Regulation is useful and necessary when it comes to ensuring the financial health and success of small businesses. The problem, however, is that often the type of the proposed regulations are confusing rather than clarifying for small business owners. Groups such as the Association of innovative lending platforms (ILPA) are pushing for transparency in pricing information for loan products, and many of the country’s leading small business lenders have adopted this uniform information. When legislation ignores what is already working effectively in industry, it becomes redundant and often counterproductive.

ILPA’s SMART Box model is one example. This The comparison tool enables lenders to provide SMEs with clear and consistent prices, calculations and explanations to help them understand and cost their financing options. While developing the model, ILPA spoke with small business owners to identify the pricing metrics they wanted to see when seeking funding, including total cost of capital, annual percentage rate and cents per dollar. In one 2018 US Federal Reserve Study (focused on the effectiveness of online small business lending), the comments were clear: Small business owners surveyed overwhelmingly appreciated “the format and richness of the information” and the ability to do an “apple-to-apple comparison. apple ”from a tool like SMART Box.

Can’t Small Businesses Depend On SBA Loans?

It is true that not all small business owners are looking for a quick and low loan. Some have more traditional financing needs than the old banking model. Some of the most popular types of financing for small businesses are traditional bank loans and SBA loans.

  • Traditional Banks: Most traditional banks are reluctant to process loans under $ 100,000 due to their high compliance and underwriting costs. It doesn’t pay them in the long run. In particular, if a small business owner or startup doesn’t have a good credit rating or a thick credit history, they are unlikely to be approved by a bank. And while credit isn’t a barrier, time can be. Bank loans generally take a few weeks to process, from application to financing.
  • US Small Business Administration: SMEs that are eligible for SBA loans are likely to benefit from favorable terms. But if a business doesn’t have an established track record and / or is in a high-risk industry, it might be out of luck. If eligible, SBA loans can take as little as 30 days or up to six months to finance. This usually doesn’t work well for businesses that need to move quickly.

Yet often a few thousand dollars is all it takes for a small business to establish itself on a solid footing. The majority of small business owners declare needing only $ 100,000 or less, and faster than bank and SBA loans can deliver. According to Lendio Economic outlook for SMEs report, in In Q2 2019, the average loan amount on the platform was just over $ 16,500, with funds typically delivered within days.

Online lending markets, with a variety of lenders available, are unique in their ability to offer business owners a full range of financing options: quick infusions of capital like business credit cards and lines of credit. credit, to term finance and commercial mortgages.

The point is that small businesses, and therefore the small business economy, cannot survive without all of these forms of lending.

Online lending is here to stay

Some financial traditionalists may have forgotten what happened after the 2008 recession. Banks and credit unions fell out of the small business lending market and moved upstream, where it seems. they only lent to businesses that did not need financing to survive.

Online lenders who have entered the small business landscape to fill the void have taken huge risks. Whether it was attracting capital to finance loans, underwriting businesses efficiently, managing loans without extremely high default rates, they had to innovate in ways that traditional lenders simply couldn’t. , and most still don’t.

Ten years later, established online lenders like OnDeck and Kabbage are living proof that this digital transformation is not just a passing fad. The fintech market will continually evolve to meet the diverse needs of its customers. A 2018 report of the Treasury Department recognizes developments in digitization, data and technology, and increasing access to credit for small businesses. It emphasizes the need for the US financial regulatory framework to evolve to enable innovation and ensure a competitive global market for financial services.

Further, according to the NDP study, “With increased access to capital, small businesses across America can grow. As these businesses succeed, so do those around them. As such, American communities across the United States have achieved a positive economic impact from online lending. “

As research shows, fIntech platforms provide viable and secure financing options to millions of business owners in the United States. And when these companies have access to capital, they are a powerful force for economic growth and job creation.

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David A. Albanese