This article was originally published on Forbes and is republished her with the author’s permission.
Some of the most forward-thinking community lenders in the U.S. are part of what we’re doing at Lendio (disclaimer: I’m the founder and CEO), but you don’t have to look too deep in the news to see that online lenders are gaining steam. Traditional lenders need to watch out. In fact, you don’t even need a crystal ball to predict that the small business lending landscape could be very different 12 months from now.
OnDeck just raised $77 million, Kabbage recently raised $270 million of debt financing, LendingClub just raised $115M of equity & debt, and Merchant Cash & Capital raised $75M. I’m sure I’m missing some, but you get the idea. It wasn’t too many years ago, there were really only a couple serious alternative lenders, but since 2011, we’ve seen a number of legitimate contenders enter the market. And, recent legislation is making crowdfunding platforms a place many people are looking for capital.
Community bankers were once the source of capital Main Street business owners relied on when they needed money to grow and expand. Unfortunately for many of them, that source has nearly dried up. The smallest small businesses are going online for the capital they need because that’s where they can find it. What’s more, the way online lenders are raising capital, it sure looks like someone believes it has the potential to be very profitable.
Why is Online Lending Doing So Well?
For starters, the current small business-lending infrastructure is inefficient. There is capital to lend, there is demand, but the way traditional lenders connect with borrowers is inefficient. Regulation doesn’t make it easy by any means and the last few tough years for small business has risk-averse bankers hesitant to stick their necks out. What’s more, most bankers aren’t really interested in any real innovation in small business lending.
That said, there are some bankers stepping outside the box. Celtic Bank is leading the way as they try to streamline the SBA loan process for loans under $150,000. Their goal is to fund in as little as five days. As I’ve mentioned before, SmartBiz/Golden Pacific and Superior Financial Group are doing the same. I’m convinced this is a partnership (traditional lending with more streamlined technology) worth talking about. The partnership between a traditional lender and a technology partner is successfully making low interest capital through the SBA loan guarantee program available to more small business owners than could have been done before. They didn’t change the rules, they simply looked at where they could make the process more efficient and did it. This business model has the potential to change things for Main Street.
We are in a new day of age where every business owner has the world of information at their fingertips. The speed of business continues to race forward and business owners don’t have time to wait 30-60 days to find out if they are approved for a loan.
I don’t think anyone is seriously suggesting we take a shoot-from-the-hip approach to small business lending, but I’m convinced the pendulum has swung too far against access to capital for small business owners. I view the growth of online, non-bank, alternative lending as a market correction bankers should pay attention to. I think it’s time for bankers to innovate or run the risk of becoming irrelevant—so far as small business lending is concerned.
I’m cautiously optimistic the ability to access capital is going to get better for the real job creation machine in our country. Main Street grows on borrowed capital and if we really want to see the economy grow, we need to encourage innovation that puts money into the hands of small business owners.