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What Impact Does Online Lending Have on the U.S. Economy? - Biz Platform

11 Aug 2018 - 09:38 |

What Impact Does Online Lending Have on the U.S. Economy?

Getting a business loan in the United States is notoriously difficult. In fact, a survey of more than 10,000 small business owners revealed that a whopping 82 percent were denied financing by their banks.

For traditional financial institutions, the payoff simply isn’t there: Because the processing and underwriting costs of financing a loan for a startup or an established business are the same, banks stand to make a lot more money when they focus their efforts on bigger businesses that are low-risk and high-return.

That gap in funding has been filled by alternative financing platforms, particularly online lenders. Technology enables lending providers and small- and medium-sized businesses to work outside the confines of traditional lending constructs. That means that not only can they determine their own criteria for assessing an applicant’s creditworthiness, but they can also make decisions — and extend credit — more quickly.

In a country where small businesses create two out of every three new private-sector jobs, it pays to ask: How has SMB-friendly online lending impacted the U.S. economy?

Online Lending’s Cup Runneth Over

Last month, NDP Analytics released a report, “The Economic Benefits of Online Lending to Small Businesses and the U.S. Economy,” sponsored by the Electronic Transactions Association (ETA), the Innovative Lending Platform Association (ILPA), and the Small Business Finance Association (SBFA), which revealed that online lenders fueled $37.7 billion in gross output and helped create more than 350,000 new jobs, generating another $12.6 billion in wages, over a three-year period.

The impact was also significant on an individual level: For every dollar lent to small businesses, borrowers’ sales increased an average of $2.31, resulting in $3.27 in gross output to local communities. The report noted that more than a third — 36 percent — of small businesses struggle to cover their operating expenses, making gains like these significant for not only building a successful company, but simply keeping the doors open.

The report highlighted one difference that enables online lending platforms to help small businesses successfully qualify for and repay loans: flexibility. Online lenders provide a wide range of financing options, including lines of credit, term loans, and even equipment financing loans. By customizing lending products to the individual businesses requesting funds, these lenders are able to lower their own risk by providing access to the appropriate amount of capital for the small business.

This, in turn, allows online lending to address a longstanding problem: credit disparity. Minority-owned businesses, the U.S. Department of Commerce Minority Business Development Agency found, are denied loans about three times more often than businesses not owned by minorities.

Online lenders, who don’t have in-person meetings with entrepreneurs that might allow language or cultural barriers to impact their decision-making, have created a large user base among lower-income areas. NDP’s report found that nearly a third of all online borrowers come from low-income regions.

Online Lenders Set New Expectations

After lending a combined $10 billion between 2015 and 2017, online lenders are changing how small businesses expect to access capital. Technology is their strongest ally, as these platforms have relied on tech to automate many of their processes, from the loan application to underwriting. By empowering technology to do a chunk of the work, these lenders can quickly approve borrowers — often within minutes.

Online lending platforms also keep their overhead costs low by not operating physical retail branches or employing an army of underwriters, calculating stacks of loan approvals one by one. By keeping their costs down and speeding up their operations, these companies have positioned themselves to grow in the same way many businesses in the e-commerce sector have: eMarketer indicated that e-commerce sales were purported to have increased more than 23 percent between 2016 and 2017.

And that reliance on proprietary technology is by design. “Small business owners are far more worthy of funding than what dated tax returns imply — we see greater value in evaluating their true character, and technology provides us that lens,” says Kathryn Petralia, the president and co-founder at Kabbage, one of the online lending platforms that contributed to NDP’s study. “Traditional lenders unfortunately, yet significantly, underserve small businesses in need of working capital; the study shows new platforms provide deserving opportunities for small businesses to grow their businesses and the greater economy.”

Kabbage has found speed and ensuring its products fit the way their customers work is of the essence: Between 2014 and 2018, the company saw the number of loans accessed through its mobile platform increase by more than 360 percent. The total dollars accessed via mobile increased by more than 1,220 percent. All of this points to a need for small businesses to gain access to funds however and whenever they need it, and online lending platforms seem to have anticipated this move faster than their banking brethren.

That doesn’t mean that traditional financiers will disappear. “Online lending complements, rather than replaces, traditional funding sources,” says Jason Oxman, the CEO of ETA. “Advanced technology enables online small business lenders to gather information and assess credit risks quickly to provide critical funding for small businesses. Online small business lenders provide key options and benefits to American small business owners in the highly competitive lending marketplace.”

While banks may have structured business lending in a way that provides benefits to large, well-established businesses, new solutions offered by online lending providers fill the gap for small businesses. Because of small businesses’ big impact on the American economy, it follows suit that online lenders’ impact has been bigger than many may have realized.