LOMBARD, Ill.—A new survey indicates that CUs should be concerned about the threat to their business lending portfolios from the emergence of alternative lenders.
Raddon Financial Group’s most recent survey of 1,200 small businesses reveals that one out-in-10 small business owners feels credit has dried up and financial institutions have stopped lending to small businesses.
What is more concerning, the report revealed, is that 15% of small business owners have applied for a business loan from an online lender that is not a traditional financial institution, with one-quarter of small business owners indicating they are “extremely” or “very likely” to use an alternative lender for their small business loan needs in the future.
While the current threat to financial institutions may be minimal from the upstarts, it is increasing, reports Marcus Rothaar, Raddon senior research analyst, in the latest edition of The Raddon Report. “At the same time, the borrowing needs of small businesses remain elevated, with 39% of owners anticipating taking out a new loan or adding balances to an existing line of credit in the next 12 months.”
Rothaar noted that, for the small business owner, the increasingly wide array of options to raise capital can be seen as a benefit—coming from companies like Ondeck, Kabbage and Lending Club.
“What is the appeal of alternative lenders to small businesses? What do they offer that traditional lenders do not?” asked Rothaar. “For many small businesses, the answer is simple: A loan. Seventy-two percent of those that have used alternative lenders in the past have done so because they were unable to obtain their needed financing from a traditional financial institution. This may be somewhat of a relief to business bankers concerned with the competitive threat online lenders may pose, as many of the loans in the alternative market may not be ones they could – or want to – originate. In these cases, the real threat is the uncertainty as to what happens next with the business and any future banking relationships. Assuming the small business would eventually qualify for a loan from a traditional financial institution, will they return to their local financial institution, or was their initial experience with the online lender good enough to also win future business?”
Rothaar pointed out that small business are turning to alternative lenders not only due to loan sources drying up, but also to get a loan quickly and without a great deal of red tape.
“For many small businesses, pricing and loan terms will certainly influence decisions when they have more options,” said Rothaar. “But we also know from past research that the speed and efficiency of the loan process also plays a significant role. The near instantaneous decisioning and quick funding process offered by many alternative lenders are clearly attractive to business owners, as both benefits rank as highly influential in their decision to utilize an online lender.”
And alternative lenders are appealing most to CUs’ target market—Millennials. Rothaar explained that small businesses headed by members of Gen Y make up approximately 22% of all small businesses in the U.S. He said Millennials are particularly attracted to the ease and immediacy promised by online lenders.
“A third of small businesses with a Gen Y owner have applied for a loan through an online lender, with half likely to do so in the future,” Rothaar said.
Like what many other lending experts have been preaching to FIs, Rothaar said banks and credit unions should learn from online lenders.
“While alternative lending may still be viewed as a niche product today, small businesses are being influenced by – and financial institutions can learn from – the innovation and technology offered by these newer entrants to the business credit market,” he said.