December 18, 2015

Predictions and Trends in Small Business Lending for 2016

Online lending platforms will continue to be a force to reckon with well into 2016 and beyond.

We've already seen quite a transformation in the small business lending world over the recent past. And these changes have forced banks and financial institutions to rethink their game. But what trends will we be seeing in 2016 in the realm of small business lending? How will these trends affect the way banks do business?

Online Lending is Becoming More Ingrained in Lending

Historically, the online lending segment of the market has been marginal in comparison to the role that banks have been playing in small business lending. But since the onslaught of the financial crisis eight years ago, online lending firms have been swooping in to fill voids in the bank lending sector and to meet the needs of those who are seeking an alternate method of accessing much-needed funds.

Online lenders have grown so much over the past few years that their origination volume has been skyrocketing, approximately 175 percent each year, in comparison to a steady decline of about 3 percent among traditional banks.

These alternative lending firms are changing the way that small businesses access funding for their operations. And while borrowers appreciate the more lax lending criteria and quick application and approval times, it mostly comes down to convenience.

Consumers are increasingly turning to their smartphones to do business. They're less apt to walk into a bank during typical banking hours and more likely to do their banking at any other time of the day when it's most convenient for them.

Millennials, in particular, have high expectations when it comes to speed and convenience. They want to get their everyday transactions done lickity split, and have expectations about the digital means to make sure that happens.

Banks that have already set up technological platforms, or are in the process of doing so, will do well to keep up with these alternative lenders, if not join forces altogether to stay competitive and profitable. Those that don't are more likely to find themselves being eaten up by larger banks through acquisition or consolidation, or may even close up shop altogether.

About 80 percent of small business owners start their loan search online, and this number is only expected to grow from here on out. That's why banks - regardless of size and capital - need to ensure they're investing in the means to get on board with digital technology so their clients can take advantage of this ease of lending without having to look elsewhere.

Big Banks Teaming Up With Online Lenders to Speed Up the Loan Process For Small Businesses

If you can't beat 'em, join 'em. And in the case of alternative lenders, that's precisely what an increasing number of traditional banks are doing.

Banks like JPMorgan Chase are teaming up with alternative lenders to boost profits and beef up service to small businesses.
Photo Credit: Ryan Keene via Flickr cc

There's no denying the sheer convenience and transparency with online lending, and the numbers are there to prove it. Astute bankers are paying attention, and many of them are in the midst of working in tandem with these alternate lenders to make small business lending grow for both teams.

Take JPMorgan Chase & Co., for instance. The largest US bank has recently collaborated with On Deck Capital Inc. to speed up the loan process to millions of small-business clients. The combination is a unique one: banks bring lending experience and years of client relationships to the table, while alternative lenders offer technological platform experience. It's a perfect match.

The two unlikely teammates are working on a new product that will be geared towards small-dollar loans. Rather than taking days or even weeks to approve and fund small businesses, the collaborative effort will provide small businesses with fast approvals and funding within hours.

At the end of the day, banks need to make a decision: Either compete with these potential industry-disrputing lenders, or join forces to offer attractive products and options to small business customers.

Big Banks Making Smaller Loans

Whereas big banks have traditionally kept their focus on big-money customers when it comes to lending, they're beginning to rethink their lending client base. Banks are increasingly focusing on vehicles to make smaller loans to small businesses that traditionally weren't worth their time. That way, big banks can still make money on loans, despite their smaller dollar amounts.

Without a decent number of loans on the balance sheet, there's less money to be made. Big banks approved 22.8 percent of loan applications in 2015, so clearly they've got their eye on the prize.

And now that the Fed finally decided to increase interest rates at their December meeting, small business lending will be even more attractive for banks. Approval percentages could rise in the coming year, and could reach above the 25 percent mark if banks embrace the efficiencies available in the FinTech markets. And that inevitably means more profits for the lending banks.

Garnet Capital - Understanding the Small Business Lending Environment

At Garnet Capital, we have an acute understanding of the lending atmosphere of today. This is a unique talent, as it requires the combination of electronic spreadsheet presentation with good old-fashioned underwriting.

We've helped a host of banks and credit unions buy and sell portfolios, including CRA portfolios, and have also engineered partnerships between online lenders and banks.

Sign up for our newsletter today and discover our expertise and understanding of the current lending environment so you can come out prosperous regardless of what trends may come in the new year.