Last month the Treasury Department and the Small Business Administration held their Capital Access Summit. The biggest take-away for small business owners looking for a loan seems to be, “Don’t count on new government programs or legislation to help you find the loan you need to expand your business or fund working capital—look to private-sector innovation.”
Since the first summit in 2009, when community banks all over the country clamped down on credit requirements and the success of the average small business borrower finding a loan dropped from around 40 percent to 10 percent, credit seems to be easing and small business owners are having better luck finding the cash they need to create a healthy and thriving business—it just isn’t coming from traditional sources.
Since 2011, we’ve seen a real increase in the number of alternative lenders entering the fray with non-traditional loan products that seem to fit the bill for many business owners coming out of the recession with less-than-perfect credit or too short of a track record for a bank or credit union to give them the time of day. The cost associated with some of these options is higher than what would be considered by most Main Street businessmen or women as a “traditional” small business loan, but as more players enter the field those costs are coming down. I think this is a good thing for small business.
Even better—they’re looking at innovative models for evaluating whether or not a particular small business is a good credit risk. This is interesting because so many business owners have been robbing Peter to pay Paul for the last few years—and their personal and business credit rating has suffered as a result.
“…the most promising idea was for the government to support new financing models for small business that already emerged in the private sector,” writes Kent Hoover.
“These companies are using alternative measures to assess a business’ ability to pay back a loan,” said Treasury Secretary Jack Lew. “They use data like real-time shipping schedules, records held in a business’ accounting software, and even social media to determine creditworthiness. These companies usually provide small loans to small businesses quickly, and they extend loans of small sizes, which banks are typically reluctant to make.”
I’ve long felt that credit score, time in business, and annual revenues only told part of the story when evaluating the viability of a small business. I’m glad to see there are some out there looking at other means to evaluate a company’s ability to repay a small business loan. It will likely mean that a small business owner looking for a loan will have to share more details about his or her business than their financial statement, but for the 90 percent of Main Street business owners who get turned down at the local bank, they might find more success with one of the many alternative lenders.
Hoover cites Noah Beslow, CEO of OnDeck Capital, one of the alternative lenders on the Lendio platform. He said, “…his company’s credit-evaluation model is a lot different than the one you’d find at a typical bank. For example, he told summit attendees about his visit to a bank in the Midwest, where even a request for $100,000 loan required a 16-page report from a bank official. At OnDeck, that same loan could be approved in a couple of hours, and the borrower would have the money their account the same day.
Secretary Lew added, “These new financing models make it clear that greater access to information can translate into greater access to credit.”
Is this a good thing for small business? I think so. There are a number of factors that correlate to a successful business. I’m convinced community bankers should take a lesson from alternative lenders, and spend some time learning about more than credit scores and annual revenues when they meet with their small business loan customers. If, as all the rhetoric suggested in the last Presidential campaign, small business growth really is critical to the strength of our economy, maybe making it easier and more acceptable for traditional lenders to make decisions based on some of the same criteria alternative lenders are using would facilitate more small business loans. And just maybe, that would provide Main Street business owners access to the funds they need to grow, hire, and stimulate the economy in their local communities.
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