Lendio Archives - Lend Academy

New Report on the Impact of Online Lenders on Small Businesses

A new report by economic research firm NDP Analytics shares data on how online lenders are helping small businesses thrive.

May 31, 2018 By Ryan Lichtenwald 1 Comment

Today a new report was released on how online lenders are helping small businesses which in turn is creating economic activity across the US. The report titled “The Economic Benefits of Online Lending to Small Businesses and the U.S. Economy” was put together by NDP Analytics and was sponsored by the Electronic Transactions Association, the Innovative Lending Platform Association (ILPA) and the Small Business Finance Association (SBFA).

Most of us are aware of the importance of small businesses in the US economy. Small businesses employ over half of private-sector workers in the US, so access to capital for small businesses is critical to their success. Fortunately, online lenders such as the ones mentioned in the report have focused on serving the needs of businesses and activity has picked up over the last few years. Both awareness of these alternative options and the amount lent on these platforms is increasing. Originations at five leading online small business lenders increased by 50% in three years, from $2.6 billion in 2015 to $3.9 billion in 2017.

Nearly $10 billion of funding was provided to 180,000 small businesses from 2015 to 2017 according to data which included leading platforms OnDeck, Kabbage and Lendio. This activity has generated $37.7 billion in gross output, created 358,911 jobs and $12.6 billion in wages.

Another highlight of the study was reporting on where these small businesses are operating. Almost one third of small business borrowers are in lower-income communities and about 24% of this borrower demographic are micro businesses with less than $100,000 in annual sales.

What makes small business lending unique is the amount of capital needed can vary widely and one of the reasons online small business lenders have been successful is because they have been able to efficiently underwrite smaller dollar loans. According to the study:

About 42 percent of small businesses borrowed between $10,000 and $50,000 from five online small business lenders with the average amount being $55,498.

One of the most interesting data points from the research was that on average, for every $1 lent to small businesses, sales for these small business borrowers increased by $2.31, creating $3.79 in gross output in local communities across the country.

As Nam Pham, Ph.D., report author and Managing Partner at NDP said in the press release:

The economic benefits of online lending are far reaching and extend beyond the funding used by small businesses to maintain or expand their operations. As these businesses succeed, so do the communities around them. Small businesses are increasingly turning to online lenders to help cover inventory, payroll for employees, and other expenses at critical junctures in their growth. The loan impacts not just the borrower, but those who work and engage with that business.

Conclusion

The small business lending market looks vastly different than it did 10 years ago. Not only are there more lending choices for small business owners than ever before but these choices are quicker and more convenient than in the past. The platforms included in this study and other innovative online small business lenders have been the driving force behind this shift. It’s a great to see a report put together which highlights just how impactful access to capital can be and it is a sign of great things to come as this market continues to grow.

Come Together – Finding Common Ground in Small Business Lending Associations

Brock Blake from Lendio shares what the various marketplace lending associations have in common.

July 26, 2016 By Ryan Lichtenwald Leave a Comment

[Editor’s Note: This is a guest post from Brock Blake, Founder and CEO of Lendio, a marketplace for small business loans. ]

In the U.S., according to Morgan Stanley, the marketplace lending industry has seen loan originations double every year since 2010. In response to that growth, we’ve seen a growing debate about how best to support the development of innovative online lending platforms, as well as calls for enhanced scrutiny and regulation. In a short period of time we’ve also seen the emergence of different associations, among them the Marketplace Lending Association (MLA), Small Business Finance Association (SBFA), Innovative Lending Platform Association (SMART Box), Coalition for Responsible Business Finance (CRBF), and Responsible Business Lending Coalition, which introduced the Small Business Borrowers’ Bill of Rights (BBOR), each offering a recommendation for how best to address transparency for borrowers, governance and controls, risk management, and responsible lending.

As an industry I believe we should be focused on what unites us, rather than what divides us. So, to that end, I thought it would be interesting to lay out some key similarities and differences. Here’s a high level view:

Organization	Coalition for Responsible Business Finance	Innovative Lending Platform Association	Marketplace Lending Association	Responsible Business Lending Coalition	Small Business Finance Association
Purpose	Educate policymakers about online business lenders; map out a list of best practices for online business lenders	Promulgate adoption of/ adherence to the SMART (Straightforward Metrics Around Rate and Total Cost) Box disclosure	Promote responsible growth of marketplace lending, fostering innovation in FinTech, and encouraging sound public policy	Encourage the entire small business financing industry to join in upholding “fundamental financing rights that all small businesses deserve”	To be the voice of the alternative financing industry for small businesses and establish industry best practices and education
Key Principles	Simple, fast, affordable, and reliable credit products; best practices, education portal	Transparent, fair; a chart of standardized pricing comparison tools and explanations, including various total dollar cost metrics and an APR that enables an “all-in” pricing comparison of loans of equivalent duration	Transparency, fairness, responsible products, non- discrimination	Transparent pricing and terms, plain English, no hidden fees, non-abusive products, responsible underwriting	Transparency, responsibility, fairness, and security

There are differences between these associations: the Marketplace Lenders Association and the Small Business Finance Association represent, and are open only to, specific industry sectors (marketplace lenders – non balance sheet lenders – and merchant cash advance providers, respectively) and both have more of an advocacy bent than the other three. The Innovative Lending Platform Association and the Responsible Business Lending Coalition are open to all who agree to abide by a set of standards and practices – the SMART Box and the Small Business Borrower’s Bill of Rights, respectively. And I’m sure there are more. [Read more…]

Communicating the Cost of Capital in Alternative Lending

In this guest post, Brock Blake discusses the various types of small business loans offered by marketplace lenders.

March 30, 2016 By Ryan Lichtenwald 16 Comments

[This is a guest post from Brock Blake. Brock is the Founder and CEO of Lendio, a marketplace for small business loans.]

Born out of the critical need for capital created by the great recession, in less than 10 years the alternative lending industry is estimated to grow into a $1 trillion industry (Charles Moldow, “A Trillion Dollar Market: By the People, For the People.”).

Many of the new business financing products have a higher than average cost of capital in order to service businesses with higher risk profiles, who can’t qualify for conventional SMB loans.

While most applaud the new-found access to capital that is provided through these new lenders, critics of this young industry say that the higher costs put undue stress on SMBs and will end up hurting them. On the other hand, advocates say that even though the costs may be higher, these loans still help SMBs start, maintain and grow their businesses.

This heightened scrutiny puts alternative lenders in a precarious position: how can they assist SMBs with needed capital while not pushing struggling businesses over the edge with unrealistic debt obligations?

I firmly believe that the overwhelming majority of alternative lenders are providing benefit to borrowers, but it’s also clear that SMBs may not be fully grasping the cost of capital, and that the communication gap between lender and borrower may be fueling doubts regarding the intent of the alternative lending space. This is why the alternative lending industry needs to move to close the communication gap between lenders and borrowers, and to do so by using all relevant metrics to articulate the cost associated with a loan as clearly as possible.

Here are two questions lenders need to consider to effectively communicate the cost of capital.

1. Does this loan provide benefit to the borrower?

Specifically, what does the business owner need the money for, how quickly do they need it, and will the financing improve the borrower’s situation?

The borrower’s situation is important for several reasons. First, the only way for an SMB owner to evaluate the cost of capital is to consider it against the cost of NOT getting capital: what is the cost of not bulking up inventory, or of not making a critical hire? If the upside from getting the capital in a timely fashion is just incremental, the cost of capital needs to be considered carefully to make sure that the benefits outweigh the limited upside. On the other hand, this could be less of a concern if the upside is significantly greater than the cost. Second, borrowing money for cash flow for several weeks or months is very different from taking out a loan that will be paid back over years and is secured by an asset that can be sold (which is why credit card rates are so different from rates on mortgages). What’s most important to a borrower who needs an infusion to help manage a temporary cash flow situation is not the same as what’s important to a borrower investing in heavy equipment that will depreciate as it’s paid for over years. And third, while we’ve all heard the truism “time is money,” to an SMB owner that may literally be true. The flexibility to act on an opportunity or implement a strategy in a timely fashion may pay for itself in the short or long term.

Fortunately for the business owner, the alternative lending industry has opened a whole new world of loan options to help solve the cash needs of the business that owners didn’t have access to previously. These products not only help smooth cash projections, but SMBs are also able to seek funds on short notice when they find themselves in a cash crunch. The flexibility and the speed at which these loans can be funded is an important need that the alternative lending industry is meeting. While the typical time for a business to obtain funds through traditional lending sources is 60-90 days, alternative lenders are able to provide funding in 2 to 10 days. That being said, it is critical that the lender take the time to understand the borrower’s situation and priorities — learning about what’s most important to him or her. [Read more…]