Earlier this year Frank Rotman, a partner at QED Investors, released the seminal white paper, The Hourglass Effect, focused on the personal loan market and why banks exited this business. Now, he has a second paper out, this one focused on small business lending.
This new white paper, The Brave 100, was written by Frank with the help of some research done by consulting firm Oliver Wyman. The Brave 100 refers to the at least 100 alternative lenders who are providing capital to small businesses often where banks will not. It compares the new alternative small business lenders with the banks, explores each others strengths and provides insight on where the chips may fall.
Here are some of the key points that Frank makes in this white paper:
- The size of the small business lending market may not be as large as everyone thinks.
- Small businesses are not well equipped to make good decisions about their capital requirements.
- The new innovators cover the full gamut of loan products within small business lending.
- Every small business has an existing relationship with a bank.
- Banks have many advantages over the innovators but the banks disadvantages are structural and not likely to change any time soon.
- Innovators want to partner with banks mostly for customer acquisition.
- The SBA loan guarantee program may not remain just the domain of banks.
Everyone involved in small business lending should read this white paper. While Frank’s first white paper delved into his own career history working at a bank this one focuses more on empirical research as well as Frank’s unique position in the industry as someone who knows these new alternative lenders intimately. After reading this paper it is clear to me that some assumptions I had made about the future of small business lending need to be questioned.
Banks are going to be around for a long time to come. And they will likely become better and more efficient at processing and approving loans for small business. But the lending landscape has changed forever and that is a good thing for small businesses seeking capital.