Main Street Monday – Small Businesses Turn to Online Lending Options

November 4, 2019

By Mary Miller
Contributing Editor, Main Street Monday

Main Street Monday – Small Businesses Turn to Online Lending Options

Rebounding from the last recession resulted in a longer and more difficult recovery time for small businesses. What helped, according to online lenders, is their automated lending systems and platforms.

Last quarter online lender, Kabbage, originated $670 million in loans, resulting in a 45% increase from the same time last year. Along with Kabbage, Square Capital (a division of Jack Dorsey’s company Square) says it facilitated $390 million of borrowing during Q2 (22% increase). Stripe, a Silicon Valley payment company worth over $20 billion, is also planning to get into the online lending business.

As more small businesses turn to online lending options, local bank branches are closing. The digital lending process is fast, borrowers have their money sooner and no collateral is required. Additionally, some research suggests online algorithms may be more favorable to borrowers, increasing the likelihood of loan approval.

A Federal Reserve survey showed that online lenders received 32% of business loan applications last year, compared with 19% in 2016. Banks accounted for about half of lending requests during that period, though their share declined a few percentage points during that span.

Although online lenders are growing in popularity, banks are still tough competition. Banks have a long-standing reputation, a large customer base, and big budgets for technology, marketing and advertising.

Customers may be dissatisfied with the longer review/approval process at banks, but there is also dissatisfaction with high-interest rates charged by some online lenders. A visit to the Kabbage website shows that the company’s loans include monthly fees ranging from 1.5% to 10%. Despite including a monthly fee, Kabbage says its loans are easy to understand, and it offers a tool to help borrowers compare options. It helps them review the loan’s APR, as well as the total cost of capital.

While online lenders have proven that small business loans can be streamlined for efficiency and profitability with the right technology, it remains to be seen how things shake out during a period of economic distress.