Getting a small business loan from the bank has always been particularly hard for women and minority business owners. Women-owned businesses only get 4.4 percent of the dollar amount of all conventional small business loans. More than a third of minority business owners are worried they will not access the capital they need to maintain business operations. Furthermore, minority entrepreneurs are disproportionately denied credit when they apply for it, regardless of credit scores, income, or profits.
In the wake of the Great Recession and the tightening of the credit markets, a plethora of alternative, online lenders have swooped onto the scene to provide small business owners with speedy capital. These lenders have harnessed technology innovations to deploy large amounts of capital to businesses in a fraction of the time a bank can, but many do so while skirting regulations that mainstream lenders must follow. This enables them to charge high APRs and not fully disclose the terms of the loan agreements. The results for some small businesses are nearly catastrophic, with those entering into loans not knowing daily loan payment withdrawals would hit their accounts and start to quickly drain revenue. Merchant cash advances have been a particularly perilous product for many small business owners and can become a debt trap. A hard choice is emerging—either go through a documentation-heavy loan application process with a bank that can take weeks for a credit decision, or turn to an online lender for fast financing that could have significant drawbacks in the form of a high APR, daily payment terms or hidden fees. It doesn’t help that women and minority small business owners are more likely to feel discouraged about seeking bank financing.
In the midst of the increasing murkiness around small business lending, there are several reasons to be optimistic. Minority business owners are optimistic—a Biz2Credit survey of 1,500 minority small business owners revealed that more than half are very confident about the future health of their business. It also looks like bank financing for small businesses may be increasing. The 2015 Small Business Credit Survey found that among the small businesses in their sample, 45 percent of businesses that applied for financing were approved in 2015 for the full amount requested, up from 38 percent in 2014. And of course CDFIs, which have long been a source of affordable and responsible small business financing, are working hard to continue providing financing options to underserved businesses, with some developing online lending platforms of their own—such as Opportunity Fund, Excelsior Growth Fund, and LiftFund to name a few.
OFN is currently developing a cutting edge tool to provide small business owners with information they need to wade through the growing number of financing options and decide what works for them. Venturize was highlighted last week as part of the Small Business Economic Mobility initiative launched in 2015 by Sam’s Club’s second round of Giving Awards. Stay tuned for a big announcement later this month!
The small business landscape is rapidly changing and ripe with innovation. Lenders that support small businesses with technical assistance and affordable financing are closely monitoring how the growing prevalence of online lending will impact businesses in their communities—and doing their best to respond to changing needs. It will be interesting to see which online lenders emerge as safer options for small businesses and what regulations, if any, could come their way in the future.
Image courtesy of LiftFund who invested in Robin and her husband Oscar Slaton for their business Pink-E-Pie's Play Palace in Fayetteville, AR.