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Small business owners are some of the hardest working people in the world, driven by passion and vision, and willing to do some truly crazy things to make their businesses succeed. But even the hardest-working, risk-taking, most independent-minded business owners might occasionally need some help, and one of the most important ways to help small businesses is to make sure they have the working capital that they need to cover their ongoing expenses and invest in growth. This is where online lenders come in! Online lenders can help small businesses in a number of ways.
Lending When Banks Will Not
According to a Wall Street Journal article, several years after the financial crisis and Great Recession, many big banks are still not lending to small businesses at the same levels that they were before the crash. A Harvard Business School white paper found that many banks, especially larger banks, have reduced their small business lending below the threshold of $100,000 or $250,000 because it is more profitable for the banks to issue larger loans. This means that many small business owners are struggling to get the right amount of money from traditional bank loans – there is a gap in the market for small business lending, and online lenders are stepping in to fill that gap.
Embracing Technology
Traditional bank loans are all about paperwork and long approval processes – getting a bank small business loan might require a whole afternoon spent filling out forms with a bank loan officer, followed by a lengthy wait to see if you’re approved for the loan. Online lenders use more up-to-date methods to evaluate creditworthiness and issue loans, and more of the online lending process is automated, instead of using the slower-moving legacy systems that big banks tend to use.
Online lenders also embrace new and more expansive ways of evaluating business owners’ creditworthiness. For example, instead of just looking at the business owner’s credit score or tax returns, online lenders can look at a broader range of data, such as online sales data from eCommerce platforms, transactional data in a business’ accounts, shipping data, social media activity, and more. This makes it easier for new businesses that don’t have a long track record of sales or for business owners who don’t meet the credit score requirements of large banks to get funding.
Cutting Costs
According to this article from The Economist, online lenders tend to have significantly lower operating costs compared to traditional bank lenders. Online lenders do not have to pay for brick-and-mortar bank branches, and do not have as many layers of bureaucracy as a big bank. This lower cost of doing business means that online lenders can make lower-cost loans, or offer loans to borrowers who might not have qualified for a traditional bank loan.
Running a small business is never going to be “easy,” but online lenders can help make small business owners’ lives a bit easier. As entrepreneurs continue to look for flexible, user-friendly, automated solutions to their business challenges, online lending is likely to become a more widespread part of the world of small business finance.
