Small-Business Lending: 3 Key Trends in 2016

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Small-Business Lending: 3 Key Trends in 2016

It’s a great time to be shopping for small-business loans.

Small-business financing options have been expanding steadily since the economic crisis hit seven years ago. Will the trend continue? What’s in store for small-business loans and small-business borrowers in 2016?

NerdWallet asked several experts, including lenders and small-business advocates, what you should expect in the coming year.

Online lending has set a course of disruption

In the wake of the 2008 financial crash, as many traditional banks cut their lending to small businesses, online alternative small-business lending took off.

As of early 2014, almost one in five small-business borrowers sought financing from an online lender, according to a survey by the Federal Reserve. In 2015, online lending gained a “significant presence,” says Sandy Mackovich, director of outreach and business development at Working Solutions, a San Francisco-based lender geared to the needs of women and minority-owned small businesses.

“I only expect that to grow as it becomes more and more available to business owners,” she says.

Eighty percent of small-business owners go online first to search for a loan, says Rohit Arora, CEO of Biz2Credit, an online marketplace for small-business loans. That percentage is expected to grow in 2016, she says.

Andrea Gellert, chief marketing officer at OnDeck, says that lenders expect small-business owners “to become more comfortable with online lending the same way they have become more comfortable doing just about everything else online for their business — from buying inventory to managing shipping and logistics, to invoicing their customers, to business banking, to advertising and promoting their business, and the list goes on.”

The push for transparency in online small-business lending will increase

The growth of online small-business lending has led to concerns about transparency. Mackovich says some online lenders offer financing with “many hidden fees, and the APR is not disclosed upfront.”

“Business owners,” she says, “are getting into loans with incredibly high interest rates and high payments.”

Unlike traditional banks, online lenders face few regulations.

The issue over transparency has become such a pressing concern that a group of lenders — including Lending Club, Funding Circle and Opportunity Fund — this year introduced the Small Business Borrowers’ Bill of Rights, which they hope will serve as a framework for how small-business owners should be treated by lenders. For example, the document stresses that a small-business borrower has the right to transparent pricing and terms.

Some lenders expect the push for more transparency to get stronger in 2016. The Treasury Department has collected public comments about the online lending market, and members of Congress are now asking the Small Business Administration and Treasury for information on a regulatory framework.

“We think attention on lending transparency will sort out the ethical players from the rest in the industry,” Arora of Biz2Credit says. And having more transparency “will fuel online lending growth,” he adds.

In light of proposals for more regulation, lenders should be proactive in defining the future direction of their industry, says David Gilbert, president and CEO of online lender National Funding.

“Before government changes regulations or becomes more involved in our industry, we believe that lending companies will continue to create industrywide standards that help borrowers,” he says.

Despite being the tough-to-get option, SBA loans will remain a top choice

Amid the rise of alternative small-business lending, one traditional financing option remains popular: SBA loans.

The U.S. Small Business Administration’s flagship 7(a) loan guarantee program has been so popular, the federal agency was forced to suspend it in July after it ran out of funds. Congress quickly raised the guarantee limit for the current fiscal year.

“I don’t see demand shrinking” for SBA loans in 2016, says Darius Mahajer, senior vice president and San Francisco market manager at OBDC Small Business Finance, a small-business lender in the San Francisco Bay Area.

Getting an SBA loan is still known to be a tedious process that can take months, and many small-business owners can’t meet all of the SBA’s stringent requirements.

Why does it take so long? It’s about quality, says George Mavridis, associate loan officer at nonprofit lender CDC Small Business Finance.

“The lenders must perform their due diligence,” Mavridis says. “SBA loans are guaranteed by the government, which in essence is the taxpayers.”

But the SBA is taking steps to streamline the process of applying for an SBA loan by introducing new online tools. One of them is LINC, which stands for Leveraging Information and Networks to Access Capital, an online system where a borrower fills out a questionnaire that is then sent to a pool of lenders. This makes it easier for a lender to find applicants who have potential for qualifying.

The LINC system has made it simpler for small-business borrowers to get access to SBA loans, Mahajer says: “It allows us to deploy these dollars much quicker.”

The agency is gearing up for an even bigger change with SBA One, which is the “total automation” of the process of applying for SBA loans, says Marlow Schindler, SBA lender relations specialist and public information officer.

The new system will “dramatically cut the time and cost of applying for SBA capital,” she says. SBA One is expected to be available nationally by spring 2016.

More on trends at financing forum

If you’re interested in learning more about trends in small-business financing, the San Francisco Small Business Development Center will host the Small Business Financing Forum on Tuesday at NerdWallet headquarters. The event, which includes a mini lender fair, is from 8 to 11 a.m. on the sixth floor of 901 Market St.

The event is free, but space is limited; registration is required. For more information, visit sfsbdc.org, or call (415) 937-7232.

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Benjamin Pimentel is a staff writer at NerdWallet, a personal finance website. Email: bpimentel@nerdwallet.com. Twitter: @benpimentel

To get more information about funding options and compare them for your small business, visit NerdWallet’s small-business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.


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