As marketplace lending continues to grow, the industry can expect to face increased competition going into the new year, particularly in the form of large banks.
This may pose a challenge for marketplace lenders, but should be seen as an opportunity rather than a threat.
According to the latest figures from the Biz2Credit Small Business Lending Index, lending approval rates from large banks and institutional lenders has increased significantly over the last four years.
Big banks now approve 22.5 percent of loan requests, compared to 8.9 percent in June 2011, while institutional investors approve 62.2 percent of requests. Meanwhile, there has been a steady decline in loan approval rates by credit unions and small banks.
Figures for the index are determined monthly by analyzing data submitted by 1,000 loan applicants on the Biz2Credit site, after vetting for company size, credit score, and years in business.
“Small businesses have become stronger and bigger,” said Biz2Credit CEO Rohit Arora. “Many companies are moving online. When we started Biz2Credit seven years ago, 75 to 80 percent of small business owners couldn’t get loans from the bank.”
Biz2Credit, a leading player in small business funding, created the index in January 2011 to track the evolution of small business lending, and Mr. Arora cites interest rates, gas prices and a shift back to pre-2009 lending levels as reasons for the increase in lending appetite. Additionally, he believes that small businesses that survived the recession are stronger than ever before, giving big banks a greater level of comfort in lending.
There are a few ways for marketplace lenders to adapt to the shift in lending optimism, and potential synergies abound.
“Marketplace lenders must offer multiple products to cater to the customer from a customer relationship perspective,” added Mr. Arora. “We should be able to go in and help customers beyond just credit, otherwise you become just a transactional platform.”
Another way for marketplace lenders to handle the shift is to leverage the resources afforded by large banks by working directly with them. Biz2Credit is doing just that with a recent partnership announcement with Customers Bank, a community-based, full-service bank with assets of approximately $7.6 billion. Other deals are in the works.
Similar partnerships have been introduced over the past year between online lenders and traditional banks, including a recent partnership announcement between Regions Bank and Fundation Group, and it’s a trend that Mr. Arora predicts will prevail over the coming years.
The overall implication of the increased optimism around small business lending is that it’s a great time for entrepreneurs to find capital. With the low interest rate environment, Mr. Arora believes that now is the best time to lock in good pricing for those looking to borrow money.
With over 6,000 commercial banks in the United States and new marketplace lenders finding their way online every year, the opportunity exists for large banks and their digitally savvy online lending counterparts to work together and create a holistic user experience.