The U.S. economy may be on the rebound, with unemployment steadily falling and the job-creation rate having increased to the strongest it’s been in nearly two decades. But one thing that has not recovered from the financial crisis is small-business lending. According to The Wall Street Journal, the number of business loans under $1 million is down a whopping 14 percent since 2008, thanks to a decreased appetite for risk among most U.S. financial institutions.
Luckily, however, this small business capital crisis has given birth to a new category of startups that aim to offer up-and-coming small businesses a way to circumvent banks and secure the funding they so desperately need to grow their businesses, online. These online lenders come in all shapes and sizes.
These are lenders like OnDeck, which doles out loans of anywhere from $5,000 to $250,000 that last from three to 24 months and require daily payouts. Kabbage, a similar lender, offers loans from $2,000 to $100,000 that last up to six months. There are also peer-to-peer lenders, like LendingClub, which connects borrowers -- primarily consumers -- to investors, including both institutions and individuals. LendingClub provides loans up to $35,000 that vary in duration.
Then there are marketplaces, like our own company Bolstr, where emerging businesses can raise funding for expansion from accredited investors online. On Bolstr, businesses can raise up to $500,000, and payment terms last between two and three years on average, based on our flexible revenue-sharing agreement, with monthly payouts going back to investors.
These new online platforms offer entrepreneurs three key things that bank loans typically can’t:
Fast access to capital
The average small business spends a full 24 hours searching and applying for credit, according to a 2014 survey by the Federal Reserve Bank of New York. The approval process at a traditional bank can then take several weeks, at the end of which many small businesses still get rejected. Online, business owners can apply for loans and find out whether they qualify within minutes, if not seconds.
Online lenders also use a more robust set of data to determine whether an applicant is eligible for a loan. While banks may look at factors like personal credit history and details about the size of the company and the industry it’s operating in, alternative lenders often assess thousands of data points, including social media activity and QuickBooks records, to determine eligibility. They use technology to ensure they have the most comprehensive picture of the applicant, so no one gets rejected for arbitrary reasons.
Banks are, by and large, bloated institutions, bogged down with overhead and lined with middlemen, all of which creates additional layers of cost to each transaction. That’s one reason why banks prefer to approve larger loans, because small loans are still so pricey to process and generate so little profit for them. But because online lenders are, well, online, they can cut the cost of approving a loan.
Instead of passing stacks of paperwork through an assembly line of bank employees who scrutinize every line of the application, many of these online platforms either use software to determine loan eligibility or leave it up to a crowd of investors to decide whether a business is worthy of funding. By removing a layer of inefficiency, these platforms pass their substantial savings on to the borrowers in the form of better loan terms.
A lot less paperwork
That is to say ... no paperwork. The new generation of online lenders have learned from banks’ mistakes, designing their application processes to be as easy as possible. In some cases, that means simply filling in some basic information about your company. In others, it means uploading bank statements. But none of this requires a personal visit to the bank or extensive conversations with a loan officer.
For time-strapped business owners, the seamlessness of securing a loan online may be the biggest perk of all.