December 26, 2018

Small Business Lending Is Changing -- Here's How Banks Should Too


Small businesses needing loans are increasingly turning to nonbank lenders. Why? Because banks became more risk-adverse about small business loans after 2008. Banks should partner with nonbank originators to reap the rewards of the latter's increased small business lending.


Since 2008, the portion of small business loans held by banks has fallen almost 20%, according to Forbes. Why? Because in the wake of the Great Recession, banks became much more averse to the risk that small businesses can pose.

Small businesses are increasingly turning to nonbanks for loans.

But that doesn’t mean that small businesses aren’t getting loans. They’re increasingly going to a different well for the water. Last year, 24% of small businesses in the United States applied for loans online rather than to traditional banks, according to American Banker. That’s above the 21% of small businesses that went to nontraditional nonbank lenders in 2016. More importantly, it illustrates a growing trend: small businesses are increasingly making nonbank lenders their friends. Online nonbanks lent over $6 billion in small business loans last year.

Multiple Nonbank Lenders

A host of nonbank lenders has moved in to fill the space. They range from SmartBiz, which offers loans from the U.S. Small Business Administration (SBA) in an accelerated time frame, to OnDeck, which facilitates short-term loans of up to two years to businesses that may have a subprime credit score or a short time in business. 

Nonbank lenders often offer loans to businesses with lower credit scores or less time in business than banks usually require.

SBA loans are highly desirable to small businesses because they offer lower interest rates and longer terms than many bank small business loans do, so SmartBiz’s ability to cut the time to approval is likely to be a huge selling point. OnDeck, on the other hand, will lend to businesses or individuals with a FICO score as low as 500, far below the lending cut-off of traditional banks. It will also consider loan applications for businesses that have been operating for just one year, as opposed to the two or three years of traditional banks.

These two funders are joined by FundBox, which is an updated invoice factor that doesn’t call itself by that name. Invoice factoring is the purchase of unpaid invoices from a business and providing cash advances for that amount. FundBox advances small businesses 100% of the value of their outstanding invoices, and is a nonrecourse firm – so the businesses are off the hook if the invoice doesn’t get paid. Fundbox charges a hefty annual percentage rate (APR), at 44% to 64%, but it’s still considerably under the 80%-plus APR that traditional invoice factors receive.

And these are just three with distinct business models. Other nonbank banks, like Square, PayPal, and even the vendor arm of Amazon are making more and more inroads into small business lending.

Get in Touch with a Whole-Loan Broker to Partner with Nonbank Lenders

Some observers feel that banks are well out of small business lending, as the length of the economic expansion means that a downturn is increasingly likely at some point. When it comes, banks will be out of small business lending, while nonbanks enjoy the yields available with this product.

But in fact, it’s more prudent for banks to add loans by partnering with a nonbank lender. The loan sale advisors at Garnet Capital have developed these relationships in consumer and commercial sectors. For more information, sign up for our newsletter today.