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May 9, 2017

Show Me the Money

Ask any small business person about the challenges they face and at least one will be access to capital. In simple terms M-O-N-E-Y. Often no one wants to lend you money when you need it. When you don’t need it, everyone wants to lend you money. Another issue is the paperwork and complexity to apply for loans. When I needed cash to launch my business, I started in a pretty traditional way. I took stacks of paper and went from bank to bank. It was time consuming, but it worked. The first loan was under $100,000, typical for small business. Small business lending statistics have been consistent recently. Over 70% of small businesses are looking for loans less than $250,000, and more than 60% want loans less than $100,000. These are generally the loans a lot of lenders don’t want to handle because they prefer bigger, more profitable transactions.

The good news is today there are many more options from alternative lending sources.

Recently I heard a speech on small business credit and capital by Nat Hoopes, Executive Director from the Marketplace Lending Association. He spoke about the growth of financial technology also known as “fintech”. Essentially, fintech refers to an industry made up of companies who use technology to compete with traditional institutions, like banks.  Peer-to peer lending sites like Lending Club and Funding Circle are members of the Marketplace Lending Association.

While doing research for my book Small Business for Big Thinkers, I profiled one online lender, On Deck, and learned a lot about why borrowers turn to this kind of funding. For one thing, alternative lending sources make the borrowing process fast, simple, and transparent. Unlike the reams of paper you need to submit with some other types of loans, the application process is usually one page online and takes about ten to fifteen minutes to complete. Often these companies approve loans based on three months of bank processing, or three months of merchant processing. Here’s the part that really makes you take notice.  Decisions can be delivered in as fast as one business day, and funding in as fast as two business days.

It makes you wonder how alternative lending sources approve businesses and react so quickly when some traditional ones cannot? It’s all about the technology that seamlessly aggregates digital information – such as cash flow, merchant processing information, and social data – to evaluate the true health of a business.

Of course, you can expect to pay more for money from these sources, but this does not seem to bother some small companies. Those I spoke with believe speed and ease are the top priority.  Some experts also believe paying a higher interest rate is not necessarily bad. Business owners who pay more may be better prepared when the artificially low rate cap comes off interest rates. Small businesses need to consider all the options when searching for affordable credit. They also need to consider the risks, because how you manage money and your credit is one of the most critical aspects of business. The alternative market won’t discipline you. You must to do that.

If you need a primer on what is happening, check out the Harvard Business School report The State of Small Business Lending: Innovation and Technology and the Implications for Regulation by Karen Gordon and Mills Brayden McCarthy.


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