Small Business Confused About Alternative Lending Options

The Federal Reserve Bank is very interested in new online lending platforms targeting small business to the point they gathered small businesses together in an online forum to get their views on these new alternative lending channels. And what they found was very interesting.

The Fed knows that there is a vacuum in banks lending to small business, those defined as Mom & Pop businesses with 2 to 20 employees and less than $2M in revenue. No one wants to deal with these guys unless they sign over their life with personal guarantees. Too risky. Too small. Too focused on one key employee.

But this is a space that is a lifeblood of employment. The Fed is concerned, and rightly so, that these new lenders, while opening up new lending, can also be very expensive. And transparency is not always apparent in the fine print to the small business.

If you are a small business selling on Paypal or Ebay or Amazon Business, you may be getting offers to borrow based on your platform sales.  If are you just a small business needing a loan, you have plenty of choices, such as LendingClub, Kabbage, OnDeck, Prosper, Funding Circle, etc. for credit Most of these vendors have differences, some minor, some major.

The Feds study used an online focus group rather than traditional internet surveys, allowing for insights and exploration beyond ticking a box. The small businesses visited actual online lenders and shared their impressions.

Key Findings of the Study

More and more, small business does not perceive banks as a likely credit source. No surprise here. In fact, some of the respondents viewed online lenders not as a distinct category but a way to shop for credit.

The problem is small business does not know how to compare product offerings from different vendors. Online web sites look straightforward but many businesses raised concerns around data security and privacy with their financial information collected. This will be something online lenders will need to overcome but the small business must know that it is critical to underwriting and risk scoring. The better the data, the easier it is to make a loan. The better the risk score, the better the pricing from the lenders (you hope).

Remember, risk scoring is critical because these platforms don't typically have skin in the game. The whole concept of peer to peer was to match borrowers with investors. So investors want to know the risks they are taking.

Tomorrow we will look at what the Fed found to be the biggest challenge with these online platforms.

Trade Financing Matters will be launching its 30 Alternative Business Finance Vendors to Watch over the coming weeks. Please contact me at dgustin at if you are interested in learning more.

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