Alternative Finances

Survival Of The SMB Lending Fittest

While it can be an overly used slogan – small businesses really are the backbone of the United States economy. Over half of the American workforce is employed at one of the nation’s nearly 30 million small businesses.

And, this statement has been true for quite some time – small businesses have contributed about 65 percent of the jobs economy, according to the Census Bureau, since 1965.

Small business as a whole are important – but they represent such an incredibly wide and heterogeneous swath of economic efforts that it’s been hard to conceptualize – or really effectively pitch to – SMBs a single group.

The last decade, however, has seen that situation change, particularly when it comes to financing for small and medium sized companies.

“Since 2008 and 2009 capital dried up for everybody,” Stephen Sheinbaum told PYMNTS in a recent interview. Sheinbaum is the founder of Merchant Cash and Capital (MCC) – a small business alternative lender –  and, more recently, Bizfi – a marketplace for SMB credit.

The marketplace for SMB credit had actually began to shift quietly as the small community banks and credit unions – the traditional funding source for many smaller businesses – began to decline in number. In 1984 there were 14,000 community banks and today there are less than 7,000, according to recent reports in Fortune. However, that contraction intensified during the Financial Crisis as more community banks closed and those that were left couldn’t justify the underwriting costs associated with small dollar loans.

This, noted Sheinbaum, presented an opportunity for technologically oriented lending platforms like MCC that were first exploring the marketplace in the mid-2000s to offer not just loans, but improved services, to a much wider variety of firms as traditional credit markets were drying up.

“We’ve provided a billion dollars in financing to around 20k or so business owners who have made 35k transactions,” Sheinbaum noted. “The reason we have been able to fund so much over the years is that we are so technologically driven  – we’ve automated the underwriting process and merchants have the ability to come onto our funding platform and go through an automated underwriting process. They can be approved for a deal in a matter of minutes. And we are doing in minutes what used to take days or weeks at the banks.”

And, Sheinbaum noted, as part of the natural evolution of the market.

“The merchant can receive a real quote in just a matter of minutes. Within our space we are presenting OnDeck, MCC or CAN Capital like we are Progressive Insurance – we’re being totally agnostic and presenting all offers side by side. The goal is to make this a wonderful platform for merchants to come and manage it as a one-stop for loans.”

Sheinbaum says they’d obviously prefer to extend all of the capital to all of the businesses that come through their virtual doors, but they also want to be a credible broker if they are true to their “one-stop shop” definition. That means that if OnDeck or CAN Capital has the better product for a merchant, MCC is best served in the long run with merchants getting the best result possible in the alternative lending space.

“To take a popular example – whether you are Coke or Pepsi, you are benefitted if people are just enjoying drinking soda more. We just really believe in being long on the small business sector and we are confident that if we do the right thing by the merchants – either lending or facilitating – we will build a really strong brand.”

Because, Sheinbaum says, at the end of the day, small businesses need the next evolution of lenders, because the old bank-based services – with their weeks-long process and outsized underwriting expenses – are not well-suited to serve 21st century SMBs with increased, not decreased, needs for speed.

“I think as time goes on it will be harder and harder for small banks to underwrite small loans and I think banks will take on a different role and continue to play a vital part in the system. I think many banks will start getting involved in the business of a different side [and] are now interested in buying paper from some of the platforms. Banks will have a decision to make — what are they going to do, compete to originate the paper, or to buy some of it on the secondary market?”

The alternative credit marketplace for small business today is nearly unrecognizable from what it was 10 years ago when Merchant Cash and Capital launched – and one that Sheinbaum says he expects will continue to rapidly expand.

“Hopefully the next billion [dollars] under loan will take us less than 24 months – and we are confident about making that happen – and will really continue to accelerate and build out the automation.”

But, he noted it is one that needs to expand and adapt, and quickly – after all, more than half of all workers rely on SMBs for their livelihood.


New PYMNTS Report: Preventing Financial Crimes Playbook – July 2020 

Call it the great tug-of-war. Fraudsters are teaming up to form elaborate rings that work in sync to launch account takeovers. Chris Tremont, EVP at Radius Bank, tells PYMNTS that financial institutions (FIs) can beat such highly organized fraudsters at their own game. In the July 2020 Preventing Financial Crimes Playbook, Tremont lays out how.

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