Just like all other companies, small business owners need working capital to manage operating expenses, buy new inventory, and invest in new business equipment, marketing campaigns, or other opportunities for future growth.
Unfortunately, the traditional model of bank lending does not always deliver the types of small business loans that many business owners need – especially if the business is relatively new (without a track record of sales revenue) or if the business owner has less than perfect credit.
Additionally, many online businesses find that their online sales, social media presence and other metrics of success are often ignored or unrecognized by the traditional bank lending process – there are more ways to evaluate a business’s creditworthiness than a credit score alone, and many viable, successful small businesses are finding themselves overlooked by traditional banks’ small business lending.
There are many reasons why online loans are becoming a rising force in the world of small business lending. Online loans are more flexible, more technologically up-to-date, and better suited to many of the needs of small businesses than a traditional small bank loan.
Filling the Gap in Small Business Lending
According to research cited by the Wall Street Journal, even though it’s been a few years since the financial crisis of 2008 and the economy has largely recovered from the Great Recession, many large banks’ small business lending has still not returned to pre-crash levels.
A Harvard Business School working paper found that banks have tended to reduce their small business lending in amounts below $250,000 or $100,000, because these loan amounts are less profitable than larger loans. Unfortunately, many small business owners need loans of $100,000 or less, and are unable to qualify for these loan amounts from a traditional bank.
This is one area where online loans are helping small business owners – because online lenders can often make loans in smaller amounts than is profitable for big banks, thus opening up new possibilities for small business lending and growth.
Online Loans Match Broader Trends Toward Online Banking
It’s no wonder that more small business owners are becoming receptive to online loans for business – because consumers are already demanding more options and accessibility for online banking and mobile banking.
According to recent data cited by the Financial Times, the number of bank transactions occurring at brick-and-mortar bank branches has decreased by one third in the past six years, as consumers have embraced online and mobile banking options to handle routine transactions and deposits.
According to Adobe’s 2015 Mobile Consumer report, 75 percent of Millennials and Gen Xers want to conduct banking online on at least a monthly basis, and more than 20 percent of Millennials (and 14 percent of Gen Xers) want to be able to apply for banking products online. In fact, a majority of mobile consumers in the U.S. and U.K. say they would have no problem using a mobile-only bank.
With consumers getting more comfortable with online banking, it just makes sense that more small business owners are looking for online loans. Online banking and online lending are becoming the new normal in the financial services world, and small business lending should be part of that same larger evolution. Just as business owners have gotten accustomed to being able to do personal banking from a mobile device, they are also increasingly comfortable with looking for online loans when they need access to working capital.
Online Loans Use Data-Driven Technology
Online loans for small businesses can be issued faster and more flexibly than a traditional bank loan, which typically requires lots of paperwork and a lengthier approval process.
Online lenders have developed more innovative ways for automating the loan application process and for assessing the creditworthiness of business loan borrowers – for example, by evaluating the businesses’ online sales results, social media activity, shipping information, and other data that doesn’t always show up on a traditional credit report. Even new startups that don’t have long histories of earning income can often qualify for loans with the more flexible, data-driven standards of online lenders.
Online loans are going from an “alternative” source of finance to becoming a mainstream “new normal” for small business lending. When small business owners feel underserved by the traditional bank model of lending, or when they need a more convenient, flexible alternative to a bank loan, online loans can help fill the gap and keep supplying businesses with the working capital they need to grow. Online lenders tend to be more innovative, speedy, and well suited to the new opportunities of mobile banking and online sales. Altogether, there are several advantages that online loans can offer to small business owners that are looking to get access to working capital: speed, convenience, flexibility and adaptability are making online loans a significant force in small business lending.