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How SMBs — And Their Lenders — Brace For Regulation


As the fluctuations within the small business lending industry continue, SMEs must keep their eye on the state of the market: whether capital is available, how affordable it is and where it’s coming from.

Marketplace lender Bizfi released today (Sept. 13) the results of its research on how small businesses are managing the changes made to how they access financing. And in an interview with PYMNTS, Bizfi Founder Stephen Sheinbaum offers his own take on how alternative finance players are managing those changes, too.


What SMEs Face

According to Bizfi’s Small Business Growth Survey, demand for financing from alternative funding sources is at a “record high.” More than two-thirds of companies surveyed said they prefer to seek loans from alternative sources rather than traditional banks. Less than a third of small businesses plan to seek a bank loan from a local bank, while nearly 28 percent said they’ll use a credit card or line of credit for their financing needs.

For Sheinbaum, this came as no surprise. For one, he said, the speed at which small business owners can access financing often makes alternative lending players a winner over traditional routes. SMEs that aren’t borrowing much, compared to larger businesses, are more willing to take on a higher interest rate because of the speed and certainty of that loan, he added.

“Someone’s not that concerned, very often, about a few [interest rate] percentage points either way,” he explained. “They need the money. Maybe they have an opportunity to by something, and if they pay their supplier in the next five days, they can get a big discount.”

Researchers at Bizfi concluded that this demand for alternative funding is good news for the overall economy. The vast majority (87.5 percent) of SMEs surveyed said they are investing more in their businesses this year than last year, and 91.4 percent of those that are boosting investment said they’ll be borrowing money to do so.

The majority of borrowing small businesses, Bizfi said, are borrowing either between $10,000 and $40,000 or more than $40,000, and they’re looking to place those funds in more than just working capital needs. Investing in inventory, hiring new employees, expanding and adding locations and investing in equipment are among the most popular goals for the small businesses surveyed.

For lenders, Sheinbaum said, having a specific target for small business financing can be considered a positive development.

“Sometimes, for us, we’re much more comfortable and confident when someone has a specific use for the money, as opposed to working capital or cash flow,” he said. “If someone wants to buy equipment, or refurbish their place or take on another line of goods or products, then that’s better to us than someone who’s saying they need to make payroll.”

What all of this means is that small businesses are feeling pretty optimistic about their futures and are willing to invest in growth to make the most of that optimism.

Sheinbaum said that conclusion was a “pleasant surprise’ for the company.

But according to the report, small businesses do have some concerns about regulation. Specifically, 28.7 percent of companies surveyed said they have been affected by the Federal Reserve’s decision to raise the interest rate earlier this year, and the decision to do so impacted their willingness to spend and invest in their own companies.


What SME Lenders Face

SMEs aren’t alone in their concerns over the regulatory environment. In a statement announcing Bizfi’s report, Sheinbaum pointed to the traditional banking sector’s retraction away from SME borrowers as a driver behind small businesses’ attraction towards alternative financers. It’s a pattern that has been commonly cited since the 2008 financial crisis and could be the new normal for small businesses.

According to Sheinbaum, it all comes down to regulation.

“The regulatory environment for small banks right now is very difficult,” he explained. “They have a lot of concentration limits in terms of industry or zip code — restrictions that make it hard for them or a little daunting.”

Today, what that means is less competition between alternative lenders and greater collaboration. For Bizfi, collaboration emerges in the form of white-labeling its solution out to other platforms, like Jack Henry & Associates, which enables the financial institutions using Jack Henry tools to also use Bizfi’s SME financing solution for their own small business customers.

Sheinbaum also pointed to other collaborations between players like OnDeck and JPMorgan, or Fundation and BancAlliance, in which traditional banks link their SME clients to the services of alternative lending platforms.

But as small businesses eye interest rate regulations and as traditional banks eye regulations that impact their ability to lend to small businesses, alternative lenders are also facing increased scrutiny from lawmakers.

While Sheinbaum said he and Bizfi welcome regulation as something that would heighten transparency for small business borrowers, he told PYMNTS that there are concerns about how officials will approach any incoming rules.

“The concerning part to me is that I want to make sure that we have really well-reasoned and rationed decision-making in the legislative process, because, so many times, the government tries to accomplish one thing, and it ends up accomplishing something entirely different,” he said. “That’s the concern to me — making sure the legislators understand the groundwork and playing field everyone is competing on.”


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