PayPal; Amazon (Why not?  They’re already selling you wheat germ.); On Deck; Kabbage;  Square Capital.  In 2018 these five online lenders originated over $11 billion in loans, almost all to small businesses.  In another segment of the small business lending space lives peer-to-peer lending.  Online lenders such as Lending Club and Prosper have been operating in this space for several years.  Another one of the major players – Funding Circle, reports that they have originated $9.5 billion in loans.  Again, a high percentage to small businesses.

Most banks, especially smaller banks, can’t compete in this market because traditional banks still have to use conventional underwriting methods to underwrite almost any loan request including very small loans such as the sizes that any small business owners often need.  It becomes cost prohibitive for a bank to go through the same process for loans that are often higher risk and don’t make the bank much money.  Adding one zero to a loan request (say $500,000 versus $50,000) for example takes almost the same process as a small loan request.  So why make small loans?  Small business owners needing working capital or inventory financing for example don’t have time to wait for a loan committee to make a decision.

The mega banks are getting there.  But unless smaller banks can figure it out they are going to continue to lose small business customers.

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