April 29, 2018
Small businesses make up 99.9 percent of all businesses in America. Brock Blake, the founder and CEO of Lendio, the nation’s number one marketplace for small business loan, quotes this statistic often, and for good reason. There’s nothing small about the impact these types of businesses have on our economy. Yet they routinely report difficulty in accessing the capital they need to start, maintain and expand their operations. Only half of small firms receive the full amount of funding they request. It seems counterproductive to limit financial services to those who are the driving force of the economy, but luckily, technological transformations are changing this.
A new report on small business lending in the U.S., released this week, shows an upsurge in lending from online small business lenders, and the economic impact of this lending activity is widespread and significant.
The study was conducted by NDP Analytics and is based on data collected from 2015 to 2017 from five of the nation’s largest small business lending platforms, including OnDeck, Kabbage and Lendio. Key highlights from the report show that these online lenders:
The report tells an interesting story about the role online lending plays in the country’s economic well being. Business leaders are thrilled to see the impact these financing options are having on small businesses and beyond, but it’s still a small piece of the pie. A recent Federal Reserve report shows that 48 percent of loan applications still go to large banks and 70 percent of the micro firms that applied failed to get the amount they requested. There’s room to broaden the impact.
Money is power and small businesses need more of both
For the mom and pop repair shops, main street cafes, small manufacturing firms or independent contractors in our communities, business ownership is more than a lofty ideal. It’s a way of life. These folks know firsthand how grueling it is to survive in business. They also know how crucial it is to have access to small business loans—nearly three-quarters of small business owners seek loans to start, operate or expand.
An integral part of the fabric of our communities, small businesses provide many of our everyday goods and services and employ over half of the private-sector workers in this country. For every $1 in lending to small businesses, they create an average of $3.79 in gross output in their communities. The vitality of these businesses relies on access to capital. They need financing to get started, purchase inventory, cover operational expenses and expand, yet they are underserved by the very banks that retain their deposits. An undeniably challenging financing gap still exists for small businesses in America, and only through democratizing access to capital for these business owners can we close the gap.
Democratize credit for small businesses and everyone wins
Historically, the democratization of credit has spurred significant economic progress in America. The Jimmy Carter Community Reinvestment Act (CRA) signed into law in 1977. This piece of legislation was designed to stamp out the practice of redlining, common in the mortgage industry during the 60s and 70s. Redlining was essentially denying loans to borrowers in low-income areas, sometimes based on race, sex or marital status.
Once banks began opening mortgage opportunities to all communities and community members, the number of homeowners in lower-income neighborhoods grew significantly, and small business owners in the same areas began to borrow more funds in turn. The CRA put into practice the idea that banks should not only be drawing deposits from communities, but they should also be pumping money back into them in the form of growth capital.
According to Laurence K. Fish, former chairman of Citizens Financial Group, the CRA transformed cities and neighborhoods across the country, and shifted the nation’s thinking to “a broader definition of responsibility, shared by more, and investing more deeply in the people who invest in us.”
While these changes have been positive in many sectors, traditional financial institutions have not kept up with the diverse growth needs of small business owners in America, nor are they doing enough to serve the underserved—including those in lower-income markets and segments.
Business financing needs a revolution
Nearly one-third of online small business borrowers are located in lower-income communities and 24 percent of the borrowers are microbusinesses with less than $100,000 in annual sales, according to the NDP report. Unfortunately, the old adage that it’s expensive to be poor is true. For many of these business owners, entrepreneurship can be costly and risky as they put their personal assets on the line to support their business aspirations because they aren’t aware other options exist.
Connecting business owners to the digital economy through online lending platforms, removes many of the barriers to access to capital. Online lenders have developed methods of credit risk assessment beyond traditional credit scores and reports, and they can provide smaller loan amounts and shorter terms to business owners who need rapid availability of funds or have no alternative sources of borrowing. Small business owners now have a lifeline when they need it, and they no longer have to limit their growth to bootstrapping or waiting around for grants and angel investors.
Online lending has not and will not replace traditional funding sources. But it does fill a critical gap in the accessibility of credit for business owners in America, and as that gap narrows, the financial impact reaches out in ever-widening circles. If traditional financial institutions and online small business lenders continue to partner to offer more creative and diverse business financing options, small business growth with skyrocket. As this report clearly illustrates, when small businesses thrive, families prosper, neighborhoods and communities burgeon, industries flourish and the American dream prevails.
Sources: Forbes, Lendio.com