In the world of small business, flexibility is key. Getting suppliers paid, managing inventory and maintaining reserves for unforeseen expenses can be akin to walking a tightrope, and everyday cash flow may not be up to the task.
To that end, online lender Lending Club, thus far mostly known for its consumer lending business, has debuted a multi-draw line of credit (LOC) product for small businesses geared toward bringing capital with speed.
Tom Green, vice president of new business initiatives at Lending Club, said that the business line of credit differs from a traditional term loan in that the latter operates with a lump sum of cash, which have payments commencing from the start. But under an LOC, SMBs borrow cash on an as-needed basis, with interest paid only on the amount that is drawn down.
Green noted that his company has been extending term loans to the small and midsized for the past two years and that the newest platform, via lines of credit, represents what he termed “an extension” of the inroads already made into that market, one made with significant feedback from the customer base already in place.
There remains a definite need for smaller enterprises to access capital at competitive rates, said Green, who added that larger banks have been choosing to bypass newer and smaller companies in favor of extending $1 million loans and LOCs to businesses that tend to have $10 million or more in annual revenues, a threshold that effectively leaves a lot of opportunity for Lending Club.
Beyond the traditional lending route, SMBs are left with the options of business credit cards, which Green said can typically carry $15,000 limits with high interest rates, or grabbing financing from other lenders who can charge prohibitive fees or the “factor rate” — which, on a hypothetical $100,000 borrowed, can be as much as 30 percent and, over the course of the life of the debt, can wind up costing an effective APR north of 100 percent.
Against that backdrop, said Green, Lending Club aims for traction within a total addressable market of “hundreds of thousands, potentially even millions” of SMBs through LOCs that he defined as “great for managing cash flow and inventory,” especially with B2B and supplier relationships.
Whereas banks may find their lending comfort zone with companies that have top lines in the several millions of dollars, Green said the Lending Club LOC — where the business revenue run rate profile starts at a minimum of $75,000 — “sweet spot” tends to gravitate toward LOC sizes of about $60,000, across a range of $5,000 to $300,000, taken on by companies with average annual revenues of $1 million. The interest rates on the LOC range from 5.9 percent to 25.9 percent, which compares favorably against the more traditional avenues just mentioned.
One of the advantages over the alternative and big bank platforms that comes through Lending Club’s LOC, said Green, is through the application process itself. The typical bank lending process can take several days, even after all data is gathered and presented, and that is just in order to find out if approval or denial is the ultimate answer.
Conversely, Lending Club touts an application process that, online, takes a few minutes to answer, with less than two dozen data points to be supplied — ranging from revenues to general employee information, along with a “snapshot” picture or PDF of a tax return.
Once that data is submitted, Green stated, it is immediately processed through the set of Lending Club algorithms that are tied to a disparate slew of data sources (across traditional and nontraditional, though not, as some online peers do, across social media). Approval or denial comes within minutes, with additional data and documentation required to process the LOC further and then disburse — usually within a day or two.
Delving further into the advantages of online LOC for B2B, and specifically through Lending Club, partnerships, such as one the company has in place with Alibaba, enable ease of merchant and supplier relationships, as the large eCommerce player can help supply data about businesses, which in turn helps the lending process.
Green noted that there is no cost to open an LOC, with no attendant monthly maintenance fee. Under the terms of an LOC, the borrower typically pays interest on the amount that is outstanding, with 4 percent of the principal paid every month, paid through 25 months maximum.