In Small Business Lending, Slow and Steady Loses the Race

Small businesses are bouncing back. After a recession-generated dip, the number of new businesses opening is once again outpacing the number of businesses exiting the market, according to the latest data from the Small Business Administration. And yet, since 2007, demand for unsecured short-term loans and term loans has decreased at traditional lenders among small and medium-sized businesses, according . Small businesses almost always need credit for a million things. So what’s going on?

Speed and Perceived Modernization

Speed has a lot to do with it. On average, Barlow estimates it takes between 4 to 6 days for small and mid-size businesses to get a response to a loan request from their primary bank. Wait times were longer for slightly larger businesses–companies with $2.5 to $10 million in sales waited, on average, 6 days for a loan response, while businesses with $500,000 to $2.5 million in sales waited 6 days, and businesses with $100,000 to $500,000 in sales waited 4 days. And all of those stats refer to wait times just to get a response – time to loan approval and funding takes even longer.


For a traditional bank, a couple of days or a week may not sound like that much time. No matter the size of the business, loan officers have to evaluate the risk of extending credit. But for a small business owner who has to make payroll on Friday, three days feels like an eternity. It also feels old-fashioned, even out-of-touch. Traditional banks now compete with alternative lenders like OnDeck and Kabbage who can provide answers in minutes.


Alternative Lenders Have Entered the Race

Alternative lenders aren’t going anywhere. While traditional banks may expand or contract their loan portfolios in response to economic trends, disruptive new lenders are just getting started, and will only continue to capitalize on the services traditional banks fail to deliver – like rapid loan-response times. Industry estimates suggest that online loan marketplaces will originate more than 16% of small business lending by 2020, with much of that volume coming from traditional banks.


Never has the truism “time is money” been more accurate. The first quarter of 2016 saw a significant uptick in credit demand from smaller businesses, despite waning optimism about the economy. But the competitive stakes for securing this lending business are permanently higher. A small business owner who’s applied for a loan online, over lunch, and gotten a response by dessert, is unlikely to be satisfied with a six-day wait ever again. Millennial small business owners are already ten times more likely to seek a small business loan from an alternative lender than the generation before.


Traditional banks can either change the way they do business in this market, or lose it entirely. It’s as simple as that. Technology enables traditional lenders to respond as quickly and efficiently to loan requests as alternative lenders. Online workflows expedite loan processing for more profitable and risk-efficient small business loans – in a fraction of the usual time.


With their proven business models, deep pockets, and experience working within regulatory systems, banks have the opportunity to take the small business loan market back from disruptive new players — if they learn to act quickly enough.

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