Online lending taking off
Providers find niche market with small business loans
A recent deal between a top online lending company and one of the U.S.’s largest small business associations is making waves in the loan industry, continuing a trend that sees online lending becoming an increasingly better option for cash-strapped small companies.
The start of April saw the National Federation of Independent Business, a Washington, D.C.-based small business support organization with 325,000 members and offices in all 50 states, go public with its plans to make cash from automated lending company Kabbage available to its members with the click of the button.
While online lending is touted for its ease of use and speed, such a deal with the 70-year-old NFIB helps push the clout of online lending into the realm long enjoyed by banks.
Atlanta-headquartered Kabbage, which was started in 2011, offers one of several models of online lending. It uses money raised from institutional investors to provide loans, with its own models to determine risk and credit-worthiness. The company’s online loans function as a line of credit for borrowers that they can keep coming back to for more money when they need it. The lines of credit range from $2,000 to $100,000 and the company now does over $1 billion in loans annually.
Kabbage banks on the speed at which borrowers can get the loans and wants its customers to continue to come back when they need more cash.
This is perfect for NFIB and its members.
The association’s senior vice president of marketing Mark Garzone pointed out that access to working capital for expansion or short-term cash needs is essential for all small businesses to thrive, including his group’s members.
Citing a recent Federal Reserve study that found the average small business loan applicant spends 26 hours searching for credit options, contacts about three different financial institutions each time it needs money and has to fill out three loan applications to get it — if at all — NFIB leaders view Kabbage’s online loans as a better option.
“Many of our members — like a number of small businesses — struggle with the standard loan process when they need access to working capital,” Garzone said. “Kabbage has helped more than 100,000 small businesses get much needed financing, and we’re excited that we can help connect our members with Kabbage.”
In 2015, online lending hit a high-water mark. According to data from Morgan Stanley, online lenders provided $7.9 billion in small business loans, a 68 percent increase from the year before. While this is still just over 3 percent of the total small business loan market, estimates suggest online lending could capture 20 percent of the loan market by 2020 and should quickly hit over $200 billion annually.
Aside from the ease of access to money, online lending’s popularity can be largely attributed to the availability of loans that banks don’t want to bother with, loans less than $100,000 commonly called low-dollar loans. Since it cost banks just as much to process a $100,000 loan as a multi-million-dollar loan, but the profit is much higher on the larger loan, many have just eliminated loans less than $250,000 altogether.
However, as NFIB pointed out, these low dollar loans are the ones small business want or need the most. It is why teaming up with Kabbage is so appealing.
In addition to online lending business models like what Kabbage does — using investor money to provide loans — there are also peer-to-peer lending platforms that connect institutional and retail investors directly with borrowers, as well as online loan marketplaces that connect borrowers with a range of traditional and alternative lenders, putting a loan application out to many possible sources, which increases the likelihood of approval.
Companies including OnDeck, Lending Club, Prosper, Funding Circle, Biz2Credit and Fundera, as well as Kabbage, have all risen to prominence using one version of these different online lending options or another.
Since banks generally aren’t that interested in the smaller loans that, at this point, typify online lending the sector has continued pretty much unchecked as a non-threatening competitor in the overall loan industry. But the bigger piece of the pie it gobbles up, the more banks may start to react, and plenty are taking notice already, partnering with online lending companies to float some of their money into the online loan segment.
Kabbage head of customer marketing Jon Parise said the deal with NFIB lends credibility to his company.
“This partnership allows us to get the backing and support of a really well-established and trusted organization,” Parise said. “This allows us to get in front of customers that are not just hearing from us about what we do, but also a trusted organization.”
But in the bigger picture, Parise said the teaming of Kabbage and NFIB has industry impact in the same way. NFIB has a strong policy presence on Capitol Hill and being in the same corner with Kabbage showcases the value and growing importance of online lending for small businesses. As it is a new sector, the government has been considering regulation, which online lending companies worry could restrict growth and are demanding a role in shaping policy.
“The online lending space is growing and we want to make sure we get the attention of Washington,” added Parise. “Their organization has a larger presence at the table in Washington — with NFIB on the side of the online lending industry in general, it can help.”