Tuesday, July 3, 2018
Survey data from the Federal Reserve Board and the Federal Bank of Cleveland, published June 28, 2018, shows significant growth in nonbank finance. Browsing to Borrow: "Mom & Pop" Small Business Perspectives on Online Lenders updates the Fed's 2015 study on alternative lending.
The report shares perspectives from 42 small and midsize business (SMB) owners who have up to $2 million in annual revenue and who recently shopped online for financing. Researchers acknowledged the sampling does not represent a broad demographic, noting their main objective was to "surface key issues that could guide future research, data collection, and policy analysis."
"Nonbank, online lenders are becoming more mainstream alternative providers of financing to small businesses," the authors wrote. "Borrowers can apply in minutes and receive funds in days or even hours, expedience made possible with data-driven technologies."
The researchers also suggested that numerous business owners choose alternative lending products without fully understanding their financial obligations or how the products work. They provided the following three key findings:
While the study's key data points underscore widespread growth in alternative lending, nonbank finance leaders challenge its characterizations of products, disclosures and rate structures. Jorge Sun, co-founder and CEO of LendingFront, and former founding member of OnDeck Capital, said online lending has expanded SMB finance options, but a gap remains between product awareness and product acceptance.
"The study recognizes that many small business owners would prefer to borrow from traditional lending institutions because disclosures and protections are clearer and more consistent," Sun stated. "The online lending market cannot be truly 'mainstream' until those same banks embrace online options for borrowers; that will force the industry to evolve, embrace more customer-oriented procedures and, ultimately, attract a broader base of users."
Karen Kerrigan, president and CEO of the Small Business and Entrepreneurship Council (SBE) called access to working capital a critical need for entrepreneurs and SMB owners. The SBE supports numerous bills aimed at improving access to capital that are making their way through the Senate and House. If passed, these initiatives will help to modernize and streamline red tape associated with the capital markets, she said.
Heather Francis, CEO at Elevate Funding LLC and an active SBE member, suggested the Federal Reserve study's findings were based on preconceived notions about alternative finance. "It was echo chamber, designed to get the results they wanted," she said. "When merchants walk into a bank, loan officers help them understand what they qualify for; not once do they ask merchants if they know what an APR is or how much a product will cost them on a daily and monthly basis. We provide that information up front."
Francis urged merchants to do their research and work with organizations that adhere to industry best practices. Darren Schulman, president at 6th Avenue Capital, agreed, saying not all funders are created equal. "Research the funder and find out if they will answer your questions," he stated. "We help every merchant understand what we give them, how much they will pay us back and any related fees and it's right on the front page of their agreement."
Schulman said his company fights very hard for merchants, because the end goal is earning their renewals. "We even offer a reconciliation option based on estimated future receivables," he said. "You send us proof, and we will lower the payments. Try doing that with a loan."
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