A report out of the US says one in five small businesses are turning to non-bank alternative lenders for their financing needs. And former Small Business Administration head Karen Mills (now a senior fellow at Harvard Business School) reports that online lending is the fastest-growing segment of the small-business-lending market.
Although these stats and reports are out of the US, the Canadian market is not far behind. Why are business owners turning away from traditional financial institutions?
First and foremost it’s quick – most lenders can process loans in 2-3 days. For repeat customers many can approve funding the same day. Traditional lenders typically take up to 2 months to process loans.
Small businesses are very nimble and need to be quick to respond to opportunities. For example if a retailer has an opportunity to purchase inventory from a supplier at short notice, an on line lender can provide the funds needed to take advantage of “special” supplier discounts. A bank wouldn’t be able to help in this situation due to the time required to prepare all the required documents.
Convenient – on line lenders allow the client to do business from their home, office or smart phone. There’s no need to take time out of their busy schedule to make multiple trips to the bank. In addition, banks require financial statements, personal tax returns, and a business plan. These can take weeks to produce and after paying an accountant to produce them, are expensive. Most on line lenders require bank statements, proof of sales volume and a recent Notice of Assessment form CRA. All of these documents can be uploaded, emailed or faxed to the lender.
High approval rates – Year after year the biggest challenge for small businesses is “access to working capital”. Banks typically require a business to be profitable for 5 years and meet very strict financial ratios. Banks don’t lend on working capital so if you’re looking to buy inventory or do a small reno or hire staff or do more marketing, the bank flat out says no. Banks lend on equipment or real estate but not day to day working capital.
Most other on line lenders approve loans based on the sales history of the business rather than the personal credit history of the business owner. Many businesses are relatively new (under 5 years) that are showing good growth but because of their “age” don’t meet the banks minimum 5 yr requirement.
Flexible terms – clients have the option of choosing a fixed or variable payment option. With the variable option payments are based on the sales volume of the business. A percentage of sales is used as the payments that “ebb and flow” with the sales trends of the business. As business grows so do the payments. If the business slows down the payments are reduced. Most businesses that have seasonal sales trends prefer this option.
Clients can also choose the amount they repay on a daily basis and the length of the term. Some clients use the financing for seasonal inventory so they choose 3-4 month terms. Others use the loan for a 1 time project such as a reno or marketing campaign and therefore choose a 12 month term.
Micro payments – small payments are made daily rather than a lump sum monthly payment at the end of the month. Most clients say this is much easier to manage from a cash flow perspective.