The business loan industry has become very competitive as a result of technological advancements. At one time banks were the main providers of funding to small and medium sized businesses, and their only competition was mainly with each other. Now banks must compete with online private lending organizations, social media lending networks such as crowdfunding or peer to peer, and many other online platforms for funding just to name a few. Even investment banking companies and private venture capitalists are getting involved with funding small businesses in a big way. As an example of new market entrants, Google, a leading search engine recently invested significant money in the industry. The lending landscape has changed dramatically over the last few years and banks continue to see new and very aggressive competitors on almost a daily basis. This competition is affecting the cost and standards of borrowing and the small and medium sized business owners are getting the benefits.
There has been incredible growth in the business loan industry recently. Technology combined with an overwhelming demand for funding have been the major components for this growth. For starters, business lenders now have access to information and can approve small businesses for business loans in a matter of minutes. A small business can be analyzed using social media indicators, credit backgrounds can be accessed instantaneously, and many other bits of data that make judging a business loan candidate much easier today. Also, internet platforms constructed using the latest technology have helped streamline the entire funding process where some business owners can have funds wired into their account in just a few minutes after they apply.
Banks however are not participating in the technological boom. The business model of lending with banks still relies on face-to-face exchanges. Also, as a result of suitability requirements from government regulations put in place after the financial crisis banks require an enormous amount of documentation. This paperwork is very time consuming to procure and verify. In today’s fast paced world business owners want access to working capital immediately and banks do not have the ability to move that quickly.
What is ironic is that banks themselves are responsible for the growth in the alternative lending industry. After the financial fallout in 2008 banks became very strict with who received a business loan. As small business owners were struggling financially and watching their credit deteriorate, banks tightened the noose even further making it almost impossible for many small businesses to receive funding. This occurred at a time when they needed the money most. This demand and lack of supply fueled the growth and investment into the private lending industry.
As more organizations and individuals enter the industry it is only natural that competition increases, and prices and standards to acquire business loans decrease. The natural effects of competition are taking place and an industry that has barely any regulations, self-regulation is beginning to take place. The lending standards amongst private loan companies are changing dramatically, and the changes are benefiting the small business borrower. For instance, just a year or two ago the average merchant cash advance or alternative business loan pushed out for the shortest time at the highest rate. A small business owner on average was funded for about 4-6 months at about 30-50 percent over the life of the exchange. Now there are deals occurring for 18 months with rates as low as 20-25% or less. Although banks offer some of the lowest rates, the time they need to fund a deal along with the falling rates of competitors have made them loosen their standards in many ways as well. In a recent message from the FED, “Banks that eased their C&I lending policies generally cited increased competition for such loans as an important reason for having done so.” As all of the competition increases, rates will be subject to fall even further, and the flexibility to lend will loosen, and the small business borrower will reap the rewards.
Technology has changed the business loan industry in many ways over the last few years. Increased competition amongst banks and private lenders has caused many organizations to loosen their standards when lending to small businesses. Today more and more borrowers are getting funded, and the funding rates are improving. As competition continues to increase the benefits are likely to continue for small and medium sized business owners looking to borrow working capital for their business.