While small business loans used to give average Americans the opportunity to realize their entrepreneurial ambitions, times have changed. As former SBA Administrator Karen Mills wrote in her sobering 2014 working paper, “The State of Small Business Lending,” the recent collapse of community banking and the lack of profitability inherent in big banks issuing small dollar loans has effectively left small business owners without access to traditional small business loans. However, the rise of online lenders offers burgeoning entrepreneurs a ray of hope.
Yes, it really is that bad
The cold hard truth is banks just don’t want to give loans to small and medium-sized business owners anymore. As this “Entrepreneur” article points out, commercial and industrial loans of less than $1 million fell by 12 percent from 1995 to 2014. In addition to the recession making big banks more risk averse, the reality is a bank receives the same rate of return for a $100,000 loan as it does for one that’s $1 million. There’s just not a great deal of profit to be made in making small dollar loans. Conversely, the number of small community banks and credit unions operating in the United States in 1984 was 14,507. Due to consolidation and closings, that number fell to 6,840 in 2014. With 48 percent of small business owners naming a bank as their primary financier, this trend represents a serious problem for aspiring entrepreneurs.
The new lenders
With such grim information in mind, ambitious small business owners may be wondering where to turn. Increasingly, the answer to that question has been online lenders. A 2014 survey conducted by the Federal Reserve banks of four major markets found that 20 percent of small businesses seeking funding looked toward online lenders. Why? Popular online lenders like OnDeck, Kabbage and CAN Capital are disrupting the finance industry by using a big data approach to make their loan determinations. For example, OnDeck uses proprietary software to analyze an applicant’s credit score, cash flow and social media profiles to make its lending decisions. If a loan request is approved, an applicant will have their money within one business day.
How bad do you want it?
As with any form of lending, there are some strings attached. The average OnDeck loan comes with an interest rate of about 54 percent. That’s a considerably higher rate than offered by most banks. Additionally, OnDeck and CAN Capital demand that you make daily payments on your loan. That said, if you’re not interested in taking a risk, you probably shouldn’t own your own business. Online and alternative lenders saw their small business loan balances jump by 175 percent from 2013 to 2014. That means just as Apple offered a lifeline to recording artists who were displaced by devastating contracts within the music industry at the turn-of-the-century, online lenders are in a position to do the same for burgeoning entrepreneurs today. The money is on the table and those with the courage to pursue their dreams will have the opportunity to do so. The only question you have to ask yourself is, how bad do you want it?
This article was written by Mario McKellop of Examiner.com for CBS Small Business Pulse.