Recently I participated in the 11th annual Governor’s Utah Economic Summit here in my home state. Each year, the summit brings together top leaders and decision-makers in the business, government and academic sectors to discuss not only the economy here in Utah, but the global economic impacts of our business communities.
I had the pleasure of moderating a unique panel dedicated to discussing unconventional funding for small businesses. The panel brought together experts from key sectors in the world of small-business lending: Ana Sirbu of BlueVine, an online lender specializing in invoice factoring and line of credit products; Martha Dreiling of OnDeck, an online lender offering term loan products between $5,000 and $500,000; and Roger Shumway of Celtic Bank, an active SBA lender with working capital loans averaging $100,000. As moderator, I was also able to chime in from Lendio’s perspective as an online lending marketplace that matches small business owners to funding from more than 75 lenders.
The Evolution of Unconventional Funding
When it comes to accessing capital to fuel their businesses, many small business owners are taking the road less traveled. Ten years ago, if you needed financing, you went to the bank. After the market crash of 2007-08, banks started focusing on loans over a million dollars because it cost the same to underwrite these large loans as it did the smaller ones. The individualized needs of small-business borrowers, along with the credit crunch, have led to the birth and development of a host of opportunities in unconventional funding. Non-bank lenders have moved onto the scene, recognizing that Main Street businesses are important potential customers, but they are underserved.
According to a Lendio survey, 74 percent of small businesses would switch banks if someone else would give them a loan. The small business community benefits from competition; it raises the tide for everyone. Here’s what the panelists had to say about unconventional funding when it comes to providing more access to capital to underserved markets, how banks are responding to changes in the industry and the future of online lending:
How Is the Lending Industry Serving the Underserved?
Dreiling: A 2016 Federal Reserve study shows that small business owners spend 33 hours looking for financing. The thesis of OnDeck is that good small businesses are underserved and they need the fuel faster than banks can provide it. Small business owners need a process that moves at the speed of business, which is hours, not days.
Sirbu: It’s about making the customer jump through as few hoops as possible. The goal is to make access to capital simple, fast and flexible. We see very large repeat behaviors from consumers because we’ve made the product extremely intuitive.
How Are Banks Responding?
Shumway: Online lenders’ focus on serving the underserved forces banks to be better. Banks have traditionally done a bad job loaning small amounts of money to small businesses. While most banks realize there’s a shift in the lending space, they also know it’s only first innings for online lending. Banks are trying to get up-to-speed by implementing technology that helps them speed up the process. Small businesses probably have more financing options than they ever have.
Dreiling: OnDeck was the first fintech company to partner with a top-10 bank. There doesn’t need to be a conflict; we can partner together to deliver the right experience to small businesses.
What Does Lending Look Like in 5 to 10 Years?
Sirbu: Technology is here to stay and so is the use of data. More and more, players will increase their use of data in decision making. We’re unlocking this new market segment that didn’t have this as an option. We’re potentially growing the market segment. This will encourage additional small business owners to get a loan that could enable them to grow their business faster and take advantage of new customers or trends. We’ll see the market expand in the future.
Dreiling: Fintech companies and banks will continue to partner together. It’s going to be harder for new online lenders to emerge. Fintech will go in one of two directions: they’ll become agents of a bank or become a bank.
Shumway: The fintech industry has banks’ attention. Over the next 2–5 years, it will be those that can generate assets that perform that will survive. The “fin” part will become more important than the “tech” part. But the technology component is here to stay.
As an advocate for small businesses, I loved hearing these industry experts share customer success stories as well as their commitment to providing more efficient and individualized access to capital for small business owners. In light of industry trends, and because of the push to better serve the underserved markets, there’s never been a better time for small businesses to get financing.