Small Business Lending: The Good and Bad News
Small businesses have long been called “The Backbone of the Economy.” In order to grow many small businesses rely on loans to buy inventory, repair equipment, and market themselves in order to bring in customers. Unfortunately following the 2008 financial crisis it has been extremely difficult for small businesses to get loans from traditional banks. Following the near-collapse of the banking industry, those left standing cut back severely on their lending operations. However new data shows that lending at big banks is on the rise. Still, is it enough?
Approvals Up at Big and Small Banks
According to a report conducted by Biz2Credit, small business lending approval rates at big banks was up in April 2015 for the sixth straight month, climbing to 21.70%. This marks a new post-recession high as approval rates have risen for 12 out of the last 13 months. Meanwhile small business loan approval rates at small banks inched up to 49.60% ending a streak of 11 straight months of dropping approval rates. However despite the slight improvement in approvals, April marked the sixth consecutive month that small banks denied more loans than they approved. While the continued increase in bank lending is certainly encouraging for small business owners, approval rates at smaller banks are still less than 50% while approvals at big banks remain under 25%. For small business owners who need access to capital, these figures may still prove to be frustratingly low. Luckily alternative and online lenders have entered the marketplace to help those entrepreneurs in need.
Alternative Lenders Step Up
The good news is today small business owners have more options than ever when it comes to securing a loan for their businesses. In fact many online and alternative lenders not only serve as a ‘Plan B’ for getting a loan but may even be a better option for borrowers. Although several of these alternative lenders get lumped together, their operations actually vary greatly. One of the largest players in online lending is Lending Club, which became a publicly traded company late last year. Lending Club is the leader in what is known as “peer to peer lending.” Basically small business owners apply for a loan on the Lending Club platform and, once approved, investors — ranging from individuals to institutions — fulfill their loan in exchange for a piece of the interest the loan will generate. Lending Club allows small business to borrow up to $300,000 for various business needs starting at rates of just 5.9%. Businesses applying need to have been in business for at least two years, have annual sales of at least $75,000, and no recent bankruptcies or tax liens. Additionally the applicant must own at least 20% of the business and have personal credit that is at least fair or better. Another company that also went public in 2014 is OnDeck. Unlike the peer to peer model that Lending Club’s platform utilizes, OnDeck actually loans small businesses funds from their own reserve. The company allows small businesses to borrow up to $250,000 and approves business based on a proprietary formula with over 2,000 points of data. Just as Lending Club and OnDeck have found the Internet to be a great place to do business, so too have many other entrepreneurs. As a result there is even an alternative lender that focuses on loans to online retailers. Small businesses that sell on sites like eBay, Etsy, or Amazon, have been in business for over a year, and have sales of at least $1,000 a month can apply for a loan at Kabbage. The online lender will attempt to confirm your online sales and then tell you how much you qualify to borrow — up to $100,000 in some cases.
The U.S. Small Business Administration also offers loans to entrepreneurs in order to start or grow their businesses. Although these loans can be very beneficial to those who receive them, the average SBA loan takes two to three months to be processed. To get started on an SBA Loan application, you can review their checklist here.
For small business owners who need access to capital, there is good news and bad news. While lending is trending upwards amongst large banks, their approval rates are still less than 25%. The good news is that several online and alternative lenders are now available to entrepreneurs in need of a loan. With these options, small businesses can find the funding they need to take their companies to the next level.