The Evolution of the Business Lending Industry

Small businesses in America account for 99.9% of businesses, about half of the workforce, and two-thirds of the jobs added by the U.S. economy. Over the last 25 years, U.S. small businesses have created 12.9 million jobs (SBA, 2022). Small businesses are truly the engine of the American economy.

Here, we’ll explore U.S. small businesses, why they’re so essential, and how fintechs like SmartBiz® may help small business owners access the funding they need to grow and thrive.

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Small businesses in the U.S.

A small business is typically defined as a firm that’s privately owned and has fewer employees or lower revenue than the industry standard. As a general rule of thumb, they are independent businesses with fewer than 500 employees. A table of small business size standards is available from the SBA here. Most small businesses are sole proprietorships, meaning that the only employee is the owner. The rest are employers, which can be small- to medium-sized firms, growing startups, and local establishments.

The imprint that small businesses are leaving in the U.S. is anything but small. There are more than 33 million of them in the country, employing more than 61 million people, and creating 1.5 million new jobs every year, according to the SBA.

Small businesses are essential to a strong U.S. economy.

Small business lending

Obtaining capital is often necessary for small businesses. It allows them to grow without offering any equity or ownership to an investor. Without stable cash flow, businesses generally struggle to expand, strengthen, and hire more employees.

Unfortunately, many small businesses struggle, or even just plateau, without financing. Some statistics say that 82% of business failures come down to cash flow. In today’s post-pandemic world, a slew of economic difficulties from inflation to rising interest rates, following two years of uncertainty, may be adding to the already-difficult endeavor of operating a business.

Some small business owners dip into their personal savings, but there are often other options available! Financing with the best possible rates is typically a smart alternative. Instead of using personal savings, business owners, especially those that have been in business for a while and have good business credit, may qualify to take out a small business loan with lower interest rates and monthly payments so that they can boost their business’s cash flow.

Barriers to obtaining affordable financing

Unfortunately, securing the best possible financing may come with its own obstacles. Some are cyclical, as macroeconomic forces impact the balance sheets of a business. Others are systemic. Fewer and fewer community bankscan not make smaller dollar loans profitably and, so, sadly, they don’t. Here, we discuss these obstacles more in depth:

Cyclical barriers to small business financing

When we say “cyclical,” we mean that one problem leads to the next, and they’re all ultimately connected to the macroeconomic situation. These include:

  • Sales: A decrease in sales due to unfavorable economic conditions could result in fewer small businesses qualifying for financing. Then, because they can’t get financing, they can’t run optimally. This is a cycle in and of itself!
  • Collateral: A struggling economy can hit collateral hard—especially real estate. Collateral is often necessary to secure a term loan, so without it, business owners are less likely to qualify with a good interest rate.
  • Lender risk aversion: When the economy is uncertain, banks tend to tighten business credit criteria across the board, but especially for small businesses. They do this to protect themselves, but, still, it becomes harder for businesses to qualify for financing.

Systemic barriers to small business financing

“Systemic” refers to problems that typically need to be addressed on a more global scale—something that’s obviously difficult (if not impossible) to do quickly and effectively. These include:

  • Bank consolidation and the disappearance of community banks: Community banks serve people and businesses in a narrower geographic area. They’re often more willing to work with small businesses. However, they’re on the decline. In 2000, there were just over 8,300 community banks. As of June 2020, there were only 4,277 community banks. This is startling, considering that community banks have traditionally provided more than 50% of small business loans. Bank consolidation (when two banks combine in a merger or acquisition) presents a similar problem.
  • High search costs for borrowers: The time required from business owners to find the best rates and an appropriate lender is generally significant. Typically, it takes contacting multiple lenders and spending hours on paperwork and applications before being approved by one.
  • High transaction costs for lenders: Since lenders generally have to go through the same process whether the loan is for $1 million or $100,000, they sometimes will only originate the bigger loans. This can sometimes make it harder for small businesses, especially those looking for under $350,000 in capital, to get the financing they need.
  • Lack of financial information: There is typically no single source of credit information for financial providers and small businesses. This lack of quality data makes it harder for lenders and borrowers to work together effectively.

Emergence of New Technology and Alternative Lending

To address these challenges, several more recent tools have come into play. New technology platforms, alternative lenders, and online marketplaces each aim to make capital more accessible. They’ve helped reduce search and transactional costs, increase efficiency in underwriting, and raise competition.

Following these technological advancements, online lending began to grow as a source of funding for small businesses. In 2017, for example, 24% of firms applied for funding directly from online lenders. As they became more popular, three primary financing models emerged:

Merchant Cash Advances

A merchant cash advance (MCA) involves “selling” future credit card transactions in exchange for a lump sum upfront. While they might sound attractive with their lenient requirements and quick time to funding, these types of agreements can come with extremely high interest rates, hidden fees, frequent payments, and short terms. In the end, they can have a drastic negative impact on business finances.

Peer-to-Peer Lending

Peer-to-peer lending brings together borrowers and investors to fund loans typically no larger than $100,000. Just as with MCAs, borrowers have a steep price to pay for convenience: shorter repayment terms, higher interest rates, and larger monthly payments add up to a significant effect on available cash flow.

Online Marketplaces

Marketplaces can be helpful by showing borrowers what’s out there in terms of the small business funding options that they’re eligible for. On the other hand, depending on the type of marketplace, they can’t extend direct financing, so small business owners might find themselves applying for a costly loan product.

SmartBiz to the Rescue

Founded in California after the 2008 financial crisis, SmartBiz Loans was created to give small business owners easier access to affordable funding. We help entrepreneurs obtain loans secured by the US Small Business Administration, also known as SBA loans. They’re known to have low rates, long terms, and anywhere from 5 to 20 times lower monthly payments than alternatives.

Our proprietary technology makes the SBA lending process much more efficient and cost-effective. Whereas previously, borrowers had to put in months of work into their SBA application only to receive a “no” from their chosen lender, SmartBiz reduces the time to funding by matching you with the bank most likely to approve your loan.

If you have your paperwork ready, the process can move swiftly from prequalification to funding. Our online platform makes uploading documents and moving through the application quick and easy. We match borrowers with the bank that’s most likely to approve and fund an SBA loan for your business.  If you’re not quite ready for an SBA loan or need funds more quickly than our streamlined SBA process can provide, our bank partners now offer non-SBA term loans.

In addition, SmartBiz has developed an educational, online tool called SmartBiz Advisor, which helps you learn how you can get your business SBA or bank loan ready before you apply – no cost involved. You can assess key criteria banks consider and where your business stands on each. Learn more about SmartBiz Advisor here.

Check out our customer reviews on TrustPilot to see how we’ve helped small business owners achieve their dreams.

 

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Emergence of new technology and alternative lending

To address these challenges, many digital solutions and tools have come into play. New technology platforms, alternative lenders, and online marketplaces each aim to make capital more accessible. They’ve helped reduce search and transactional costs, increase efficiency in underwriting, and foster competition.

By targeting entrepreneurs digitally, online lending began to grow as a source of funding for small businesses. Currently, online lenders process about 20% of business loan applications.

As they become more popular, three primary financing online lending models have emerged:

1. Merchant cash advances

A merchant cash advance (MCA) is a lump sum a business receives upfront that they repay over time with a percentage of their debit and credit card sales, along with a fee to the lender.

The requirements are fairly lenient and you can generally get the funding quickly. However, merchant cash advances may come with extremely high interest rates, hidden fees, frequent payments, and short terms. In the end, they may have a drastic, unforeseen negative impact on business finances.

2. Peer-to-peer lending

In peer-to-peer lending, individuals loan money to other individuals, without any financial institution working in between them.

Similar to MCAs, peer-to-peer lending is typically more accessible. However, as a result, the repayment terms are often shorter, the interest rates are higher, and the monthly payments are bigger. It’s quick money but it can ultimately hurt small businesses’ cash flow.

3. Online marketplaces

Online marketplaces serve as an intermediary that connects lenders and borrowers. They may be good resources to show small businesses which funding options are available to them. However, one disadvantage to these marketplaces can be a lack of customer service support. Applying for funding can be complex. You may have questions or need guidance so it’s a good idea to read reviews from real customers. You’ll learn if representatives are available to help if needed.

How SmartBiz® helps to solve the problem of affordable financing for small businesses

SmartBiz was established in California after the 2008 financial crisis with a mission to help provide every entrepreneur with easier access to financing options at the best possible rates. We work with business owners to help them obtain loans secured by the US Small Business Administration. SBA loans have lower interest rates, long terms, and significantly lower monthly payments than alternative funding options.

We help solve many of the common problems small businesses face when applying for a loan. With our proprietary technology, SmartBiz reduces the friction by matching you with the bank most likely to approve your loan. This makes the application process faster and more cost-efficient. When you apply with SmartBiz, you won’t need to go from bank to bank. We’ll help match you with the lender most likely to fund. Get your paperwork ready to move swiftly from pre-qualification to funding. Our bank partners also offer non-SBA term loans that may be disbursed even faster. If an SBA loan or a term loan aren’t a fit, SmartBiz offers other, custom financing solutions. There’s a reason so many businesses trust us. Apply now and find out within five minutes if you prequalify for up to $350,000 without impacting your credit score.*

*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.

WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.

 What you need to know: The information provided through SmartBiz® University and the articles contained therein are for educational purposes only. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.