Before the downturn in the economy, 80% of small businesses found financing at their banks. Only after being rejected by the banks, small business owners turned to the internet to look for alternatives.
Today, about 80% go online first, and a big portion of those – 60% – do it from a mobile platform. What’s more, 65% of applicants look at their finances after 6:00pm and on the weekends, outside normal banking hours
The Great Recession, as the economist Robert Reich calls it, changed the way we do business. Maybe forever.
The general slowdown in lending, together with stricter requirements put on the banks by the government after the Lehman Brothers crash, made the banks risk averse. After losing money in the housing bubble, small businesses, even those with good credit, found the bank process has become long and complicated. The slowdown in lending hit bottom in 2011 when only 8.9% of small business loans were approved.
Entrepreneurs and small business owner started looking for other sources. They went online to look for capital the same way shoppers went online to look for the best deals. Peer to peer lending platforms such as Kickstarter and Indiegogo flourished, provided more than $1 billion in finances in 2011 alone.
Alternative lenders appeared on the market, willing to provide quick, short term financing. These lenders, who were willing to take a greater risk, charges higher interests, sometime up to 30%-40%.
The latest and most significant threat to the supremacy of the banks is the marketplace lending, which evolved from the peer to peer model. Instead of individuals fund your company, institutional platforms have gotten into the small business loans business. Insurance companies, family funds and venture capitalists have provided billions in capital through online platforms. They offer longer terms and lower interest rates.
The technology moved forward, but the banks didn’t. Today, “not a single big bank established its own digital application process for small business loans.” writes Forbes Magazine. The banking industry which is usually on the cutting edge of technology moved slower than its customers. They turned online before the banks did.
The banks increased their lending slowly but steadily. Still, 4 out of 5 applications were rejected. Smaller banks rejected about 50% of their applicants, while other institutional lenders were inclined to fund 6 out of 10 applications at interest rates compatible to the banks and in a much faster speed.
When the economic situation improved and credit became easier, small business owners did not flock back to the banks. There are 2 main reasons:
1. Banks still focus on small business loans of $2 million. For most small business owners a smaller amount will suffice.
2. The banks tend to favor government backed SBA loans which take longer to process and longer to fund.
The banks are now declining as lenders for small businesses. Their ‘strong points’ of name recognition and the structure of branches has eroded. They may not get all this business back.