Why Small Businesses are Turning Their Backs on Bank Loans
Enter online lending options
Business owners are busy. They have so much to think about ranging from managing growth and fostering company culture to developing products and acquiring customers. In the world of a small business owner, time is money. Nowadays, there is more and more aggressive competition for eyeballs and market share, even within a small market or vertical. Speed to market and seizing every potential growth opportunity often determines if a company survives or not.
Therefore, access to capital is critical. Business owners can look at equity or debt – but most small businesses aren’t a fit for venture capital or other equity. Instead, they need to access debt in order to grow their business and smooth the cash flow gap that comes with growth.
Traditional bank lending has been done the same way for some time. While banks have put a lot of time and effort into innovating customer experience for consumers, business banking is still quite cumbersome. According to a recent FDIC study, very few banks – big or small – even offer an online loan application. This wouldn’t be such a big issue if business owners didn’t have to apply for multiple loans at multiple banks only to find they are often either turned down, or are unable to access the amount of funding they need.
The lack of certainty in approval with traditional lending is even worse if you are a female business owner. According to Experian, 39% of all U.S. businesses have women majority ownership, and employ nearly 9 million people and generate more than $1.7 trillion in revenue. Yet a 2014 Senate report showed that only 16% of all conventional small business loans go to women-owned businesses.
The true cost of capital encompasses all aspects of the process. If a CEO must spend a lot of time applying, preparing diligence, negotiating and then managing the loan via constant email and phone exchanges, the true cost of that loan is greater than the sticker interest rate. Enter, online lending options.
Online lenders that specifically cater to small businesses have grown rapidly over the past five years. They make it easy to apply, provide quick decisions, have faster turnaround times and offer a no-hassle management process. The technology-driven process is also less likely to be biased towards diverse applicants and takes away some of the fear of rejection that many business owners have when facing traditional bank options.
The trade-off right now is that a loan from an online lender is likely going to be more expensive than a bank. The ultimate solution would be to combine the technology from online lenders with the cost of capital from a bank. Currently, there are regulatory hurdles that prevent that from taking place, but an increasing amount of online lenders are looking into how to help banks leverage their technology to the benefit of business owners through bank-fintech partnerships.
These are the key questions business owners should consider when thinking about where to go for a small business loan:
- When do you need the funding by?
- What is the opportunity cost to your business if you don’t get it in time?
- If you and your team were not focused on getting a loan, what would you be working on?
- What is the cost of capital, and is it offset by the growth this capital will generate?
There are no right or wrong answers, but it’s important to see beyond the interest rates and think about what the capital is actually going to do for your business and evaluate the cost within that broader context.
Krista Morgan is the co-founder and CEO of P2Binvestor, a marketplace lender that helps entrepreneurs and innovators transform their companies from sector newcomers to industry leaders. Morgan has grown P2Bi into a multimillion-dollar company and one of the few tech-enabled commercial lenders that can rapidly underwrite and fund million-dollar lines of credit.