A recent NerdWallet interview with a former Small Business Administration official has some grim news for burgeoning entrepreneurs — big banks aren’t interested in making small business loans. However, disruptors from the tech sector are offering small business owners new pathways to success.
Why big banks aren’t making small business loans
In mid-July, a writer with NerdWallet spoke to former SBA Administrator Karen Gordon Mills about why small business owners are still struggling to get bank loans six years after the Great Recession ended. Mills explains that the problem was twofold, “Traditional banks have not found an economical model for making small-dollar loans. It costs them just as much to make a loan for $150,000 as it does to make one for $1 million.” The collapse and consolidation of community banks and credit unions nationwide has played a big role in the decline of small business lending, which has been historically responsible for 40% of small business loans. “As recently as the early 1990s, there were about 14,000 community banks in the country, and now there are only about 7,000.”
Finance industry disruptors
With big banks keeping their purse strings tight and small banks folding, how can a perspective small business owner realize their entrepreneurial ambitions? As the hospitality and taxi industries have learned in recent years, the tech sector is always happy to take advantage of deficiencies in an existing market paradigm. A range of new technology-driven companies have risen to supply hungry entrepreneurs with the capital they need via a host of new platforms. These finance world disruptors are beating the banks at their own game.
The e-lending revolution
In December of last year, OnDeck celebrated its eighth anniversary and received a $1.3 billion valuation. The reason why the company, as well as competitors like Kabbage and CAN Capital, have enjoyed such amazing success is due to their revolutionary business model. OnDeck issues loans from $5,000 to $250,000 to small and medium-sized businesses. Instead of relying almost entirely on credit scores, these companies make their loan decisions based on a wide range of factors, including social media activity, cash flow and transaction volume. Best of all, online lenders are so efficient, they get funds to their customers in about two business days.
Crowdfunding is the new black
Soylent, Oculus and Pebble all began as crowdfunded projects, and they are all now major players in their respective industries. Crowdfunding sites like Kickstarter and Indigogo can be very useful for social media savvy entrepreneurs who need some seed money. Also, proving you can successfully launch a product on a public platform will let future investors know that your company has tapped into a viable market segment. Additionally, business crowdfunding platforms like Fundable and Crowdfunder are designed to connect entrepreneurs with equity investors.
While big banks can no longer be counted on to supply small business owners with the capital they need, a variety of new and better options are available for those bold enough to pursue them.
This article was written by Mario McKellop of Examiner.com for CBS Small Business Pulse.