Alternative Lenders Disrupting Big Bank Lending To Small Business
Posted by SCOTT GRIEST
26 May, 2016
Tech based alternative lenders have doubled in origination volume every year since 2005 according to a recent Harvard Business School working paper. In 2014 the volume was $5 billion dollars’ worth and everyone in the industry, including myself, believe 2015 was near $8 billion. While $8 billion may be a large number, it is only about 3 percent of the total market place for small business financing in the U.S.
Many industry analysts are predicting that the growth rates can’t continue at the same rates outlines above. However, what they don’t realize is that data and technology are enablers to sustain these rates. Furthermore, data is the key to understanding the small business market. Big banks generally utilize personal credit for small business scoring. The new alternative lenders have quickly realized that a three prong approach of personal, business and cash flow data are key to measuring risk. These new credit risk models allow us to truly look beyond the personal data to gauge the health of a client’s business.
The most important aspect of our data analytics in not just saying “Yes” or “No,” but instead creating the right contract structure. For example, the modeling will analyze more than 100 data points and approve a client when payments take a maximum of 8 percent of the business gross sales over 8 months. Another client may be eligible to take 11 percent over a 10 month period. So the data tells us not only to say “Yes” but how to say “Yes!” More importantly, 80-plus percent of small business owner with sub-720 credit scores will get an offer from Rapid Capital Funding when the banks almost always say no.
Technology works hand-in-hand with data to continue pushing growth in the alternative lending space. First and foremost, technology eliminates most of the pain or friction points. Most clients submit documents and raw data through direct downloads and interfaces. Many of Rapid Capital Funding’s clients need only 10 or 15 minutes to download a few months of bank statements and complete a simple, one-page application (that is usually done online or on a mobile device). The digitization of the data then allows us to crunch it quickly and issue approvals with multiple pricing offer scenarios in a matter of hours. Try getting that through your local banking branch, it won’t happen. Then, virtually all of our clients sign contracts electronically on their smart phone. While possible to receive financing in just a day, most clients take two or three days, from beginning to end, as they need time to evaluate the various terms being offered before deciding on the right contract for them.
The exciting part for us as an alternative lender is combining the data and technology as clients go through the lifecycle. Most small business owners need a consistent cash flow solution to run their business and, as a result, return to Rapid Capital Funding over and over again to fill this need. Coming back for a second contract allows us to add client payment performance into our data models. This drastically improves our understanding of the client’s needs, allows us to give repayment rates that will not cause a hardship and let’s us see fiscal trends over an extended period of time. As a result, the client can get improved terms, most times, including access to greater amounts of capital, longer terms or rate savings. In addition, the process of renewing a contract is streamlined since the client is already onboard with us.
Did you know that many clients have a five-plus year track record with Rapid Capital Funding and have come back two or three times per year for financing? Original clients from the 2000s were primarily driven from necessity, most new clients are coming for the quick decision making, competitive offers and customer service that they deserve. As our data and technology continue to improve through the implementation of new features and predictive data analysis and mining, we expect client retention rates to continue to improve.
Now that the new breed of alternative lenders is finally getting traction, after a decade and scaling to become relevant in the market and compete with the big boys like Wells Fargo, American Express, people are starting to notice. We have started to see major players experiment in the space with “fast funding” products, easy to qualify for credit card offerings for small business owners and even American Express financing their premier merchants with loans secured against their future American Express proceeds. While these products are new, they are still reserved for the top tier of clients with excellent credit scores - still not much innovation to move downstream in the credit funnel. In the meantime, expect our growth to continue organically and gain speed.
Scott Griest is the managing director at Rapid Capital Funding. He has more than nine years in the small business funding industry and 15 years in the financial services space.