The U.S. Department of the Treasury recently shared a white paper about online marketplace lending. They based their findings on a RFI they issued in the summer of 2015 to study the impact of online marketplace lending on small businesses, consumers, and the broader economy. The Treasury asked 14 questions in the RFI around borrower, online marketplace lender, and investor activity and they received approximately 100 responses from individuals, businesses, advocates and trade associations.
We reviewed this report with great interest, as we have been part of the online lending market since 2012. The treasury department made six recommendations in their white paper, all of which are interesting and worth reading on their own. One of the items I found most interesting, and applicable to my personal situation, is their first recommendation to support more robust small business borrower protections and effective oversight.
The white paper says that the small business RFI commenters argued marketplace lending has the potential to “unlock access to the capital markets” for small business borrowers – I believe we have already seen this and the benefits of it. Small business owners often face challenges when trying to obtain affordable credit because many financial institutions are not focused on servicing those kinds of loans. The RFI responders suggested that providing small and micro businesses with smaller loans in a shorter time period is changing the available avenues for capital for these companies. In my opinion this is a good thing.
The report says that “Access to credit is the lifeblood of business and economic growth,” and I agree. In the US small businesses have been responsible for creating two out of every three net new jobs over the last twenty years. The ability for individuals to pursue an idea, to start a company, and to grow a business is the foundation of the U.S. economy, and to do this access to credit is a necessity. Without credit, entrepreneurs cannot put innovative ideas into action.
The white paper includes details from the 2015 Small Business Credit Survey published by the Federal Reserve Banks of Atlanta, Boston, Cleveland, New York, Philadelphia, Richmond and St. Louis. This survey reports that only half of small employer firms received the full amount of financing requested. Micro businesses (less than $100,000 in annual revenue) and startups (those in business for two years or less) in 2015 had the hardest time securing financing with 63 percent and 58 percent, respectively, reporting a financing shortfall. It is clear that there is room for improvement here, and the new AltFi lending institutions are meeting a pressing need.
Small businesses have turned to online marketplace lenders as potential financing sources. The white paper tells us that the largest small business online marketplace lending platforms originated approximately $1.2 billion of small business credit in 2014 and approximately $1.9 billion in 2015. We are pleased that many of our clients, like DealStruck, LendingPoint, Borrowell and Patch of Land, are among the companies providing this funding. Products offered to small businesses by most online marketplace lenders include term loans, lines of credit, and equipment financing loans. The 2015 Small Business Credit Survey showed that 20 percent of all small business owners applied for loans or lines of credit through online marketplace lenders, and 70 percent were approved for a loan or line of credit. Both micro businesses and more mature companies (six-ten years of operations) are increasingly considering online marketplace lenders for capital needs. 30 percent of micro businesses and 22 percent of small firms ($100,000 – $1,000,000 in annual revenue) reported applying for loans or lines of credit from online marketplace lenders.
Advances in technology and data availability are changing the way consumers and small businesses secure financing. Leveraging these developments, online marketplace lenders offer faster credit to consumers and small businesses. Over the past ten years online lending companies have evolved from platforms connecting individual borrowers with individual lenders, to sophisticated networks featuring institutional investors, financial institution partnerships, direct lending, and securitization transactions.