The wave of alternative lending options for small businesses has, without question, filled a hole in the credit markets left in the wake of the Great Recession. The old problem was that small business owners simply weren’t able to gain access to credit – and that problem rapidly grew beyond startups with a limited history or companies with uneven credit records.
In the aftermath of the financial collapse and recession that followed, many of the financial institutions that served small local businesses (small local banks) have folded up shop. The banks that remain have largely lost their taste for the smaller loans SMBs typically look for.
However, the market abhors a vacuum almost as much as nature does, and so the ground that banks willingly ceded among potential SMB borrowers is increasingly occupied by alternative lenders of various stripes. And whether an alternative lender extends funds directly, offers a P2P platform to bring lenders and lendees together or works through a merchant to provide credit to an SMB client – two things tend to be the case no matter which alternative lending player a business works with.
• The alternative lender will work much, much faster than a traditional financial institution – offering approval and access to funds in minutes or days, instead of weeks and months.
• Those funds will probably be more expensive than “traditional” lenders – and in some cases rather eye-poppingly so.
“Banks just don’t want to originate a $100,000 or $200,000 loan because in the regulatory environment and using old processes it takes them too long and it is too expensive,” Evan Singer, General Manager for SmartBiz, told PYMNTS in a recent interview. “And if they are interested, it still takes them several months, which just doesn’t work for small business who are looking for loans presumably because they you know, need money for something. Alternative lenders have come in and come in with a much faster, easier process – but the money can be expensive.”
Just how expensive can vary quite a lot – Singer noted – as can loan terms.
“On the low end, a small business might get a 15 percent APR product for a couple years,” he noted. “If they are unlucky, they will get a triple digit APR product that they have to pay over a couple of months.”
For some businesses – particularly those with thin credit files or negative ones – that more expensive funding is likely a cost of doing business, as both things represent risk to any lender and all lenders in the business of making money charge of risk at a premium.
But some companies, like the ones SmartBiz works with on its lending platform, aren’t all that risky. They are just disadvantaged by banks that are either uninterested in making SMB loans, or unable to do them in a time scale that is efficient.
“On average, our clients have between $500,000 and $1,000,000 in annual revenue, they have been in business for at least two years, they are profitable, and have on average five employees,” Singer said, noting that while all loans involve risk, a profitable two year old company bringing in a million a year probably should at least have access to reasonably priced credit. And, infact, there is a product for those businesses – a loan backed by the Small Business Administration.
“We make SBA loans easy. That’s really the crux of what we do. We do that first for small businesses with an online application where an SMB can apply for a $5,000 to $350,000 SBA loan. They can get pre-qualified in about five minutes and fill out the application in 30 minutes.”
Most SBA funds are provided via banks – where they are notoriously difficult and complicated to access. The average small business reports that working through a bank for lending can take two or three months, Singer noted, while on the SmartBiz platform borrowers can gain access to their funds in about seven days (if they are approved).
“That is much, much easier and faster than they could do from a bank – which works out since banks don’t really want to offer such a small loan,” Singer noted. “We are leveraging technology to speed up the entire process and that gives the SMB a new opportunity to not only get a loan quickly, but also get a loan that is much less expensive than an alt lender.”
Singer went on to explain that loans on their platform average an interest rate between 6 and 12 percent, are usually stretched out over 10 years (thus allowing for very low monthly payments). And they don’t really view themselves as competitors to banks so much as they see themselves as technological collaborators.
“The way we think about it is banks plus technology are part of the solution. We’re able to do something that no one else is which is really combine the banks and the tech into the one platform which is our smart biz marketplace online,” Singer said.
Because from SmartBiz’s point of view, the right solutions to get more businesses to the table to access loans, and loans that are fairly priced, are going to call for a lot of creative collaboration. It is likely in this frame of mind the firm recently announced a partnership with Walmart’s wholesaling arm, Sam’s Club.
“We’re working together to create an online business lending center. We have built and are hosting it for them. This will be a digital location for Sam’s Club members that is aimed to help [a] business decide what is the best loan option for them. There are three lending partners on the platform. It’s SmartBiz, Lending Club and also Sam’s private label credit card through Synchrony Bank.”
Singer told PYMNTS that the partnership was a natural extension both firms are making.
“We’re after the same thing out in the marketplace: to provide small businesses low cost capital in an easy way.”
This effort by Sam’s Club seems to be one of many efforts the firm is making in recent months to lure more business members with an expanded array of services. Apart from the lending platform, Sam’s has also made moves to help small business offer lower cost health care and services to help members create and submit patent applications.
At the end of the day, small businesses like the retailers, wholesalers, contractors, doctors and lawyers that SmartBiz works with are increasingly finding a digital ecosystem that is more and more trying to build out to meet their needs.
“This appears to be something small businesses need and want,” Singer noted.
And, for the first time in a number of years, it seems to be something the marketplace really wants to give them.