In late February, small business marketplace lender Lendio joined office supplies giant Staples on the floor of the New York Stock Exchange to introduce the largest partnership to date between a major retailer and marketplace lender.
The announcement was the culmination of months of planning and is the first of its magnitude, but it definitely will not be the last. As marketplace lending grows in prominence, retailers are looking for additional revenue streams as banks are showing tepid interest in funding small businesses.
The union makes sense in many ways. Staples is a well-known brand providing dozens of consumable products to small businesses. They have a strong online presence which should only grow as time-strapped business owners grow more comfortable with ordering online.
That works perfectly with Lendio, who operates exclusively online.
“Staples undertook a significant study as to what services were in high demand by its customers and 60 to 70 percent said small business loans,” said Lendio Founder and CEO Brock Blake.
An RFP was sent out to between 20 and 30 companies and Lendio was chosen.
The average small business owner knows well the pain that comes with the traditional bank loan application process.
“There’s a stat from the SBA (United States Small Business Administration) that said the average business owner applies for loans at three different places and spends an average of 26 hours filling out documents,” Mr. Blake said. “Compare that to three to seven minutes online and knowing where you stand within a couple of hours.”
Doubly frustrating about the lengthy bank loan application process is how it usually turns out. With decline rates between 75 and 90 percent, many small business owners don’t even bother, or their banker tells them that. Consider the frustration percentage even higher.
“The way it would be before this technology is they would give you the paperwork, you went home, pulled out 25 different things and take a week to fill the application out,” Mr. Blake said. “Then there’s an underwriting committee that would take a few weeks to get together and it may be another 30 days before you find anything out.”
“One of the things we know in dealing with so many banks is instead of having someone fill out 30 pages of loan documents they tell them ‘I don’t think you really are going to be a good fit’ and they decline them without going through the formal process.”
That jolts many small business owners, in particular those whose relationship with their bank goes back to their youth or maybe even generations.
“As a business owner you think ‘I’ve been banking with this bank for 10 years, and if anyone is going to give me a loan it’s them,”’ Mr. Blake said. “They go to their bank and 90 percent of the time they get declined.”
That business owner can easily get the wrong impression. It is not their suitability as an enterprise, they simply do not fit into the narrow paradigm that banks can generate profit from with a minimal and rigid product line.
“When that happens they think ‘I must be a bad credit risk,'” Mr. Blake added. “The likelihood is that bank only has one or two loan products that is their sweet spot. They’re not trying to underwrite every loan product out there. They’re trying to know what they are really good at.”
“It’s the world we love in. Banks are so heavily regulated, they’ve got a lot of red tape that prevents them from innovating maybe as quick as as another non-regulated organization can innovate.”
There’s also the problem of the shark swimming past the guppies in search of bigger prey. The average small business owner is looking for a lot less than the banks are interested in working with.
“Banks these days especially since the recession, they’re really moving upstream,” Mr. Blake observed. “There’s a lot of data that shows banks are really only interested in loans of more than $1 million. Many companies, a gas station or a restaurant, they aren’t looking for a million dollars. They need $25,000 or $50,000 to buy equipment or to expand a bit.”
So 90 percent or more of small business owners are left considering their options. While they mull, they go online to place their regular office supplies order, which millions do every month. That is where the Staples advantage comes into play, Mr. Blake believes.
“From our perspective trying to spread the word, you go to Staples and they are a trusted brand. That’s why this partnership makes so much sense They’re reaching over a million small business owners on a regular basis as that trusted brand.”
Once the small business owner sees the Lendio option on Staples’ web page and clicks over, then Mr. Blake knows there are a few qualities Lendio needs to quickly display to keep that person’s interest.
“One of the key things we do at Lendio is talk about three things all the time – options, speed and trust. As a business owner you want to have all your options in one place. You want to be able to do it in hours or days not weeks or months, and you want to have a trusted experience where you know who you are dealing with.”
“If you are a business owner, you don’t have time to become an expert in all of the loan options out there. We’ve aggregated all the best in class lenders in one spot, so when that business owner comes in we are going to scour the entire market of loans and figure out which is the best one for them.”
Mr. Blake insists Lendio can usually find most businesses from most industries in most parts of the company a loan, some pose more of a challenge than others.
“The hardest is the true startup, the business in the idea phase, without any revenue, and one with bad credit.”
“If they have good credit and they’re a startup, we’re going to have options for them. If they have bad credit but they are not a startup and have been in business a while longer we’ll be able to help them.”
“But if they have bad credit and they’re a startup, there aren’t too many lenders out there looking to make that type of loan.”
The paint isn’t yet dry, so Lendio and Staples still have some small details to work out such as promotional presence in Staples retail locations, but Mr. Blake is confident those will be ironed out.
The Staples deal has caught the eye of other players, so don’t be surprised if similar partnerships are announced in the months ahead.
“There’s so many companies out there similar to Staples that have hundreds of thousands or maybe even millions of small business customers who have plenty of things to do. These partnerships become even more relevant.”
“Since the Staples announcement there have been some other feelers sent out and there’s definitely more interest out there,” Mr. Blake said. “We’ve had some other doors open. It’s too early to announce anything.”