Small-business loans took a hit with the 2008 recession, but there are now clear signs that alternative lenders and big banks have a growing interest in providing more capital.
A report last week was evidence of the trend. Online small-business loans platform Biz2Credit released a study showing the number of small-business loans approved by traditional banks had edged higher in May, to 21.9%.
“This is the seventh month of consecutive increase,” Biz2Credit Chief Executive Rohit Arora tells NerdWallet. “My take is small-business lending will grow in the next two years.”
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Institutional lenders, including credit funds, insurance companies and nonbank financial institutions, also OK’d 61.3% of small-business loan requests last month, up from 61.1%, the report said.
In a noteworthy twist, approval rates at alternative lenders dipped again, the report said. The Biz2Credit report said that trend coincided with the growing presence of institutional lenders in small-business loans.
But that doesn’t mean alternative lenders are going away. In fact, Arora says, “alternative lending is going mainstream.”
This was highlighted by other news in small-business loans this week:
- Kabbage, a major platform for small-business loans, said it forged a partnership with UPS Capital that would allow the subsidiary of the package-delivery giant to offer its customers access to capital. Kabbage CEO Rob Frohwein said in a statement that the company’s goal was “to be able to seamlessly deliver capital to millions of UPS small-business customers.”
- Lending Club, another major alternative lender focused on small-business loans, unveiled a partnership with Opportunity Fund, a nonprofit small-business loans company. The two firms are making $10 million in loans available to “underserved areas” in California, helping roughly 400 businesses and creating about 1,000 jobs.
The growing interest in small-business loans also became more evident this week with news that Wall Street giant Goldman Sachs was drafting plans to enter that market.
Such a move would highlight a shift in the attitude of major financial-services companies, which backed away from small-business loans after the financial crash in 2008.
That opened the door for new online lenders, which now play an increasingly significant role in the small-business loan marketplace.
Alternative funding’s wild side
It’s a trend that has raised some concerns.
“A whole host of alternative lenders have entered the space,” Eric Weaver, founder and CEO of Opportunity Fund, tells NerdWallet. “It’s a real mixed bag. It’s a real Wild West.”
He says some lenders are “using very high-pressure sales tactics and un-transparent pricing and borderline deceptive marketing to offer very short-term, very high-cost financing.”
“They’re lending to anybody with a pulse,” Weaver says.
Karen Gordon Mills, former administrator of the Small Business Administration, examined opportunities and potential issues with changes in the small-business loans market in a Harvard Business School research paper.
“There is already concern that, if left unchecked, small business lending could become the next subprime lending crisis,” she writes.
David Haber of online business lender Bond Street underscored this point: “I would encourage business owners to be discerning about whom they work with in the space. Not all lenders are entirely transparent with their rates and fees.”
A positive trend
Arora of Biz2Credit says maintaining high standards is also a long-term concern in the small-business loans market.
“The worry is a lot of money is starting to come in and the underwriting standards can come down,” he says. “But we’re far away from that. … Small businesses have been credit starved for a long time.”
In an interview with NerdWallet, Mills also says, “The growth in the online and alternative-lending sector is on the whole a positive for small businesses in that it increases the points of access they have when it comes to getting the capital they need. But that doesn’t mean that they shouldn’t do their homework.
“My advice to any small-business owner is, take the time to dig into the details,” she says, “and make an informed decision that’s right for you and the type of capital your business needs.”
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Benjamin Pimentel is a staff writer NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @benpimentel
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