Traditional small business lenders like bankers have always been partners with business owners in fostering Main Street business growth. Unfortunately, part of the fallout of the financial crisis of 2008 and the subsequent recession has been an increase in difficulty for the smallest small business owners to access the funds they need from traditional sources to fuel growth and fund working capital.
Fortunately, online small business lenders appear to be stepping in to pick up the slack. “Online direct lending to small business has grown from zero to approximately $10 billion since the mid-2000s,” writes Scott Shane for Small Business Trends.
At this pace, online lenders aren’t likely to replace banks as the primary source of small business capital anytime soon, he argues, but they are becoming a great alternative for “…small companies that were previously unable to obtain credit or who had been tapping high interest rate loans from alternative lenders and credit card companies.”
Nevertheless, as online small business lending becomes more mainstream, the reasons many banks look at these lenders as partners rather than competitors can be attributed to the niche they fill providing smaller loans to their customers—loans that are less profitable for the banks. To address this challenge in the U.K., recent legislation mandates banks ask borrowers they turn down if they would like information about online lenders—sending a clear message that banks need to find new ways to serve the financing needs of their smallest business customers. And why many are choosing to partner with online lenders.
Shane suggests, “Online lending represents a new source of small business credit that is likely to grow substantially in future years.”