Making Sense of Main Street’s Approach to Online Lending
Business Solutions Despite the rebound in commercial financing since the end of the Great Recession, the FDIC reports small business loans as a share of total bank loans have been in decline since the year 2000.
The aftermath of the recession isn’t entirely to blame for the decline; small business lending has been declining for the last 15 years.
Fortunately, small businesses today have more choices available for borrowing capital than ever before. Online lenders are filling the void left by small business’ traditional lending partners, as banks have largely moved upstream to bigger businesses and bigger loans. These lenders are making capital available to more small businesses every year. Although the bank remains a good option for those that meet their criteria, many businesses that may be otherwise good borrowers with healthy businesses are often rejected by traditional underwriting approaches that look more at personal credit performance and collateral than overall business health.
So what are small business owners saying about their experience with online business lending?
The Electronic Transactions Association (ETA) earlier this year commissioned Edelman Intelligence to conduct an online survey of 592 small businesses to learn more about their experience with online lenders. The results are quite interesting.
Would they borrow online again?
Ninety-six percent of those surveyed indicated the capital they borrowed online was to fuel business growth. And 91 percent of them said they were likely to take another loan from an online lender in the future. An impressive 99 percent expressed overall satisfaction with their online business loan (59 percent expressed they were very satisfied and 40 percent were somewhat satisfied).
The top three reasons they chose an online lender might help explain their willingness to do it again:
- The process was much faster: Sixty-three percent of respondents indicated this as the top reason they chose an online loan. Acting quickly to take advantage of an opportunity is often critical to successfully leveraging that opportunity into increased profits.
- The application process was simple: Most small business owners aren’t finance experts, which is likely why 57 percent of respondents chose an online lender over other options.
- The total cost of financing was affordable: This might be counterintuitive to many who read about the high cost of online loans in the press. Total cost of financing is a very important metric for financing growth initiatives or other loan purposes with a defined return on investment (ROI). Depending upon the loan term, it’s possible for a higher-APR loan to carry a lower overall dollar cost.
Why choose a higher APR?
The majority of the businesses surveyed were more focused on the total cost of the loan than the APR when facing a short-term opportunity to capture additional ROI. In fact, 57 percent of them chose a six-month loan over a nine-month loan (with a lower APR) in order to minimize the total fees and expenses. APR is a reasonable way to compare two loans of the same term, but it does not provide the total dollar cost of the loan.
The business owners surveyed reported they expect an average return of $5 for every $1 borrowed — which may be why they are so focused on total cost. The two most common reasons for borrowing were to purchase equipment (54 percent) or to purchase inventory (51 percent); both purchases are very dollar cost sensitive.
Staying aware of your options
Sixty-seven percent of the businesses surveyed believe they have more options for financing today than they did just a few years ago. Ninety-four percent of them see having additional capital access options as a positive. These borrowers (who averaged three online small business loans over the past 5 years), borrowed an average $25,000 per loan — an amount lower than what most traditional lenders provide.
A 2015 survey conducted by the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia reported the average small business owner spends roughly 24 hours researching and completing small business loan applications with traditional lenders. Business owners responding to the ETA survey estimate an hour of their time is worth an average of $170, making those 24 hours potentially very costly.
This matters because two out of every three net new jobs in the U.S. economy can be attributed to small businesses. And their access to capital to fuel growth is a critical component of how successfully they’re able to create jobs. The last several years have seen an influx of new lending options that enable businesses to more efficiently access capital. We need to encourage the growth of responsible online small business lending to keep the infrastructure of small businesses healthy and thriving.