The Evolution of Small Business Financing

November 18, 2014

Technology is radically changing the process of applying for a small business loan and getting access to capital.

What’s more, this technology innovation has mostly occurred just in the last three to five years.

Let’s look at four ways technology is opening up capital and what that can mean for your business:

  1. The rise of lending matchmaker platforms
  2. Online platforms like Biz2Credit, Fundera, OnDeck, CANCapital, and SmartBiz SBA Loans have fundamentally altered the process of applying for a small business loan.

    It used to be that if you needed capital, you’d go to your local bank. You’d apply, submit reams of paperwork, and wait weeks until the loan committee met. Small business owners who got a “no” often assumed that was their only option. Or due to time constraints they might only check one or two lenders.

    Some platforms do their own underwriting, but others aggregate hundreds, even thousands of lenders.

    You apply one time online to get access to multiple lenders, and you don’t need to go around visiting each. The whole process is efficient, approvals are faster, and you have more choice of lenders.

  3. Alternative lending sources proliferate
  4. Getting funding is still challenging for millions of small businesses. Nontraditional providers have jumped in to fill the capital shortfall when regular loans aren’t available due to a low credit rating or no credit history. These non-financial institutions offer merchant cash advances against future credit card receipts.

    Take Square, as an example. The company that revolutionized credit card processing with its small, white swipe device now offers cash advances called Square Capital. PayPal has its own program, called PayPal Working Capital.

    Kabbage is another alternative lender with its own twist. It pitches its services toward ecommerce sellers, and makes funds available based upon verifying your financial records in QuickBooks or even your selling platform such as Etsy.

    You apply online – no credit check is needed most of the time – and funds (typically under $10,000, but up to $100,000 at Kabbage) are available in minutes. A flat fee is charged – up to several percent per month. Funds get paid back automatically out of future credit card receipts. Obtaining capital through these sources can be a bit expensive, but it’s amazingly fast and easy to apply.

  5. Microloans are more available
  6. Microloans start at $500 and go up to $50,000. Accion USA is one of the oldest microloan networks. Today there are more microloan sources than ever, including credit card companies that offer hybrid products that work like lines of credit. Even the SBA has a microloan program. Peer-to-peer unsecured loans through platforms such as Prospr are another form of microloan. And lending matchmaking platforms also open up microloans.

    You might wonder if small loans can do much good. Yes, they can. According to a recent study by Biz2Credit, the average annual revenue for Latino small businesses applying for funding was $69,000 and $86,000 for non-Latino businesses. If yours is a business of that size, you know that a loan of a few thousand dollars can make a difference.

  7. Crowdfunding
  8. Despite all of the buzz, crowdfunding platforms probably have the least impact of today’s platforms on small business capital.

    Crowdfunding is a broad term. It can mean platforms such as Gust and MicroVentures, which bring together angels and accredited investors with high-tech startups. However, fewer than 5 percent of businesses get angel or venture funding.

    Crowdfunding also refers to sites like Kickstarter and Indiegogo where individuals raise money from the public. For businesses there are some obvious downsides. The platforms are geared more for individuals than businesses. You have to market your project if you hope to raise enough funds, and that’s time consuming. And despite a few high-profile examples, relatively small amounts have been raised. In the last five years Kickstarter has funded around 71,000 projects for a total of $1.3 billion. On the one hand, that’s impressive, but it’s a drop in the bucket compared to the $600 billion of small business loans outstanding in any given year.

    A lot is changing in the world of small business financing. Your local bank is still there. But the next time you need funding, you might also want to open up your options by checking online.

Technology is radically changing the process of applying for a small business loan and getting access to capital. What’s more, this technology innovation has mostly occurred just in the last three to five years.

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