In the past, lending was formalized by financial institutions and was very difficult to obtain. Since then, banks have moved to being federally focused rather than community-centered, making lending less of a priority. Loan sharks first appeared on the scene around the same as this time to snap up those denied by large banks but still eager to borrow. Furthermore, terms on small business loans tightened during the financial crisis and have extricated much less for small firms during the recovery.
Entrepreneur just published an article about how small business owners are being rejected for small business loans because they don’t understand their business credit score.
While many in the financial community still speculate as to whether the rate of rejection is still part of the 2008 financial crisis ripple-effect. Banks normally tighten lending opportunities during economic crises. Fortunately, technology is radically changing the process of applying for a small business loan and getting access to capital.
How Platforms Utilize Technology to Reach Multiple Lenders
There are myriad private lenders and loan companies reshaping today’s lending landscape. Online lending platforms have radically modified the application process for loans. It used to be you would head to your local bank if you needed capital and apply by submitting mountains of paperwork, only to wait for weeks to hear if the loan committee approved the loan. Small business owners who were frequently declined either thought this was their only alternative or, because of timing, did not approach other lenders.
Today the opportunities to acquire sources of capital and the application process have changed drastically, largely due to technology. Many platforms generate single underwriting processes while others aggregate thousands of different lenders. One online application enables access to multiple lenders, eliminating the need for visiting each in person. The whole process is efficient, approvals are faster, and you have more choice of lenders. The three principle ways technology is opening up capital include:
- Alternative Lending Sources
Obtaining funding remains a challenge for millions of small businesses. Nontraditional providers have filled the capital shortfall when conventional loans are unavailable because of no credit history or low credit rating. Non-financial organizations provide merchant cash advances on future credit card receipts, such as Square Capital and PayPal Working Capital.
- Crowdfunding
Crowdfunding platforms have considerable impact on today’s small business capital platforms. Crowdfunding brings together accredited investors and angels with high-tech startups. Nevertheless, less than five percent of companies receive venture or angel funding, and the platforms are more equipped for individuals rather than companies. You have to market your project if you hope to raise enough funds, and that can be time-consuming. Despite a few high-profile examples, relatively small amounts have been raised.
- Microloans
Microloans range from $500 to $50,000. Currently, there are more microloan sources than in the past, including credit card companies offering hybrid products that operate similar to lines of credit. Even the SBA offers microloan programs. Peer-to-peer unsecured loans through online platforms are different forms of microloans, and lending matchmaking platforms also open up additional lending streams.
Lending has become more efficient in today’s economy as a result of technologic advancements, as almost all lending models are processed electronically via the assistance of online banking. Though easy lending could be a factor behind the downward debt spiral.
The Future of Funding
Small businesses are the fundamental core of a nation’s economic competiveness. A lot is changing in the world of small business financing. While the growth of banks and large institution lending has resulted in financial instability and property bubbles, one thing that hasn’t changed is interest. While interest rates always fluctuate, the financial gain of interest rate payments remains in the interest of banks and other types of lenders. While local banks still exist, most small businesses are expanding their funding options by checking online.