Main Street Monday — Online Small Business Lenders Have Brick & Mortar Lending Concerns

Online Small Business Lenders have Brick & Mortar Lending Concerns.

July 27, 2015

By Bob Coleman
Editor, Main Street Monday

Are online small business lenders ready for the coming regulations surely to be imposed on the industry by the Consumer Protection Finance Board?

Last year, I told the group “Winter is Coming,” in the form of regulation to their group. This year, I said, “The weather is starting to get a little chilly.”

That is one of three items that keeps the niche up at night — the unknown of future regulation.

The other insomniac concerns match brick and mortar small business lending concerns — Cost of acquisition of new customers and loans, and what will happen to defaults and losses in the next economic turndown.

Cost of acquisition was an amusing takeaway for me. I come to these events and constantly hear the mantra that brick & mortar lenders can’t make money on small loans. But, in the online world, google ad search clicks are hovering around $60 for the “small business loan” keyword ad — just for a click! I don’t know what the metric of clicks to conversion is, but if you take 10 clicks for one $30,000 loan, that is a 2% acquisition fee right up front.

The big unknown is whether the online lender’s automated underwriting models are valid. Brick and mortar small business lenders successfully survived, barely, the last economic turndown, and that experience will help them weather the next one.

Online lenders, most who entered the niche during or right after the recession, have no experience with managing a small business loan portfolio during tough times. Remember former Bank of America President Ken Lewis when he famously said in 2008, “The credit quality of our small business loan portfolio is a damn disaster.”

There are differences between online and brick and mortar lenders small business lending model, but they share common fears that keep them awake at night.