Conventional small business loans, offered through traditional lenders, may be hard to come by for smaller firms seeking capital to launch or grow operations, especially in developing communities.
That may be due to limited operating histories, owners’ thin credit profiles or a host of other factors.
Earlier this month, the Community Reinvestment Fund, USA (CRF), a mission-driven nonprofit lender, debuted its Connect2Capital small business lending platform.
CRF Vice President of Program Strategy and Development Patrick Davis told PYMNTS that such a model can help bridge gaps as smaller companies seek to satisfy capital needs.
He said the widespread availability of information — in decentralized fashion — has supported what he termed “an explosion of platforms and marketplaces, many of which are now household names.”
And while many of those platforms were geared toward consumer lending, an increasing number of offerings have targeted the business-to-business (B2B) landscape.
“From our view, the online marketplaces that exist for small business loans are all relatively similar. In general, they contain the same mix of products offered by the same list of lenders, including mostly prominent banks, online lenders, and to some extent smaller banks and credit unions,” he told PYMNTS.
Yet, generally speaking, Davis noted that smaller businesses face a range of challenges when it comes to obtaining capital, “especially small businesses owned by women, people of color, veterans, immigrants, and returning citizens.”
Smaller firms have limited operating histories and relatively less stable cash flows than larger brethren. Operating in verticals that may be seen as carrying relatively higher risk, such as childcare or restaurants, may be disqualified by traditional lenders for consideration.
“In recent years, we’ve seen online alternative lenders step up to fill the access to capital gap, but often with APRs that ultimately damage the business’s margins and potential growth,” said Davis.
Along with these challenges, many small business owners need help and guidance to understand the lending process, required documentation, and how financial statements and business plans should be prepared and presented.
And, in a bid to bring differentiated offerings to that audience, Davis said Connect2Capital offers greater transparency and advantageous rates through a marketplace model that features “a network of vetted nonprofit, mission-driven lending organizations that offer loans for businesses that may not be able to qualify for traditional financing options.”
Drilling down a bit, he said the company’s lending partners are Community Development Financial Institutions (CDFIs), certified by the U.S. Treasury. These lenders focus on fostering economic growth and mobility across underinvested communities.
He said Connect2Capital helps connect small and medium-sized businesses (SMBs) to loans that span working capital, expansion and business debt refinancing.
To this last point on refinancing, Davis said, “Many of the businesses we serve through Connect2Capital have already taken on debt from other online alternative lenders, and they come to us looking to refinance. Oftentimes, we find the business owner is unaware of the total cost of a loan they’ve taken, or unaware of restrictive terms, hidden fees, or aggressive repayment schedules that come as a surprise after the application is approved.”
Technology and the Human Touch
The small business lending space, said Davis, is ripe for further disruption through technologies that include artificial intelligence and machine learning.
“From our perspective, this is both an opportunity and a challenge. Most of the data services, models and inputs to automated credit decisioning tools are built on historical data sets that are inherently biased,” said Davis. Automation exists as just one tool in the toolkit, he said, but is not a replacement for human beings.
In terms of other emerging technologies, he pointed to blockchain, which he projected will become “more relevant” in the small business lending space in coming years. Blockchain, he said, will useful in identity verification and fraud prevention.
Open banking and third-party integration also offer challenges and opportunities for lenders, said Davis.
“Thanks to pioneers like Plaid and others, it’s become relatively common for consumers to share their financial information with a host of third parties,” he told PYMNTS. Credentials offered through such data sharing (such as bank statements) helps speed up the loan application process.
“The cost,” he said, “is allowing a third party ongoing access to very sensitive information. From my perspective, this is a question for regulators who are focused on appropriate legislation and compliance measures to protect consumer privacy. I think we’ve learned by now that we can’t expect companies — especially fast moving technology companies — to effectively self-regulate,” he told PYMNTS.