Lending Club Vice-President Tom Green held a conference call today to discuss the current state of small business lending and Lending Club’s growing success in the space.
Mr. Green, who is in charge of new business initiatives, stated the pace of Lending Club’s loan originations is rapidly growing. “Lending Club has provided more than $5 billion in loans, with $1 billion of that coming in one (recent) quarter.”
That is a drop in the bucket compared to the market’s potential, which Green estimates to be as large as $400 billion due to increased need and traditional institutions growing hesitance to lend to small business. “The online market will one day be the dominant player in small business credit.”
Small businesses are a key driver of the American economy, Mr. Green explained. “The 23 million small businesses in America account for 54 percent of sales and since the 1970’s they have created 66 percent of all new jobs.” Those businesses need capital to grow so they can fulfill their potential contribution to both the American and global economies, yet since the financial crisis, fewer of them are getting loans from traditional institutions. “Between 2008 and 2011 we saw a reduction in small businesses receiving loans from 44 to 29 percent.”
This declining success rate was succinctly illustrated in a set of data Mr. Green shared during the call. If the American economy consisted of 100 companies, 56 of those would want credit, but 18 would be too discouraged by the current environment to apply. Of the remaining 38, only 16, or less than half, would get the amounts they were seeking.
Those businesses typically have four reasons they need a loan, Mr. Green said. Those are to start the business, purchase inventory, expand their operation and otherwise strengthen the firm. The irony is that the approval process, which is difficult to begin with, becomes harder because companies are being asked to provide collateral and to have substantial cash on hand. “The banks are not necessarily serving small business in an effective way,” Mr. Green said. “If they had the collateral and the cash, most wouldn’t need the loan.”
The approval, or in most cases non-approval, period only makes the process worse. “It is not uncommon for businesses to wait six weeks before finding out they were turned down.”
Should the small business look for another source there are several available, with each having their own good and bad points. Microlenders provide great coaching but often have narrow mandates and only provide smaller amounts. Business credit cards are an option of you can pay off the entire sum every month and your needs again are small. They are most often available to those with good to excellent personal and consumer credit health, but the nature of small business development means many do not fit that profile..
Online alternative lenders provide quick decisions but the true costs are both murky and high, as their cut is not interest per se but an amount worked into the loan amount that leaves the recipient needing to do some fancy figuring in order to determine the loan’s true cost. Merchant cash advances, factoring and equipment financing are other methods with hidden true costs, Green said.
Lending Club provides more clarity for small businesses, Green explained. The rate the business pays stays firm regardless of what happens in the rest of the economy. The approval period can see borrowers get money as soon as the next business day. Business credit scores can also improve as Lending Club reports to credit bureaus and a credit score is not affected by checking one’s rate. Mr. Green added that with repayment terms of up to five years, “The flexibility allows business owners to manage cash flow in a much more effective way.”
As with any loan process there are stipulations, Green conceded. Honest data allows the process to move quickly but discrepancies between, for example, stated and reported income can cause the application to be reconsidered. Their fraud algorithm includes opportunities to contact the IRS depending on the risk level involved. Businesses must also be in operation for a minimum of two years to be considered on the platform. Their typical annual revenue flows range from $200,000 to $5,000,000.
When asked about lending Club’s competition, Mr. Green gave a response similar to many in both the P2P and crowdfunding spaces give when discussing growth opportunities and challenges. “Our main competition is the lack of awareness among small businesses that peer-to-peer loans exist as a viable option,” he said. “We need to get the word out and educate small businesses.”
While many new platforms are developing their API’s to refine their computer-oriented approval process, Green stated that Lending Club staff, while they do make extensive use of API’s, are refining which data sources they use in real time when considering a loan request. Look for Lending Club to soon roll out an API which enables their partners to take loan applications on their sites while using Lending Club technology to make a loan decision.