Alternative online lenders are a diverse, nimble, and innovative group. The many different models for online lending are the products of creativity and resourcefulness made possible by the use of financial technology to expand access to credit for small businesses, improve the borrower experience, and bring technology-based efficiencies to the market.
Policymakers and regulators must recognize that financial innovation is still in the early stages of development. While it is important to monitor ongoing market developments, the government should avoid preemptive regulatory efforts that may stifle innovation as it is evolving. A rush to regulation would harm small businesses by limiting access to capital and curtailing the options available to them, all the while being premature and ineffective. A data-based and outcomes-focused approach will lead to a stable market that allows small businesses, and consequently the American economy, to thrive.
Small Business Lending vs. Consumer Lending
Unlike consumers seeking loans, small businesses seek access to capital to hire new workers or pursue growth opportunities—purchase inventory, upgrade or expand facilities, or develop new products and services. Underwriting small business borrowers is significantly different than underwriting consumers, largely due to the data that can be used to make underwriting decisions and the diversity of products that can be offered. Online small business lenders can offer business flexibility by varying terms, payback options, or basing funding on the purchase of future receivables rather than a traditional direct loan. In most cases, there is no personal recourse for many of our financing products and our success is completely tied to the success of the small business we’re funding.
How are online lenders different than traditional lenders?
Unfortunately, regulations and red tape that is aimed at Wall Street and a reaction to the 2008 financial crisis has significantly stymied the ability of small banks to offer credit to small businesses. Online small business lenders are not classified or operate like banks. Online small business lenders don’t take deposits or have branches, so we are sometimes able to operate more efficiently than a traditional bank. Online small business lenders evaluate creditworthiness and repayment ability using sophisticated algorithms and advanced analytics that look at a host of operational data. Borrowers are also typically held to certain minimum standards with respect to length of time in business and annual revenues.
However, our goals are the same, we work closes with traditional finance to make sure we’re filling the small business credit gap and firmly support any policy that will results in greater assets to capital for small businesses.
What is “stacking”?
Small business lending is unique. When a business is looking for capital, in most cases, it is for a specific purpose like renovating a restaurant, making repairs to equipment, filling a purchase order, or expanding or upgrading facilities. When SBFA companies provide funding to a small business we are offering the amount needed and at an efficient term that is designed with the financial health of the small business in mind. “Stacking” is when another non-SBFA finance company will offer additional funding to a business that we believe puts significant financial stress on the small business. (link to SBFA best practices).
Disclosing the cost of credit