Small-business lending is an opportunity for payment companies to expand relationships with merchants, and there are signs the market is improving even more.
After a somewhat turbulent 2016 for small to medium sized businesses (SMEs), the major players appear to be finding their way. Hit by scandal in early 2016, LendingClub bounced back to end the year with a servicing portfolio of $11.1 billion, up 24% year over year. In early 2017, OnDeck Capital announced its loans under management increased 25% year over year.
This positive momentum, combined with the push for greater borrower protections (such as the Small Business Borrowers’ Bill of Rights), can be good news underserved small businesses.
While established banks remain a popular option, more borrowers are clearly turning to alternative lenders to secure capital quickly and efficiently. Within the alternative lending space, new models are emerging, including joint initiatives between established banks and new alternative lending players, as well as those incorporating blockchain and cryptocurrencies.
Financing has always been a big challenge for new enterprises, but the business world is learning how effective it can be to raise money through small contributions from a large number of people. As the popularity of crowdfunding continues to skyrocket, more startups and small businesses are taking advantage of this trend, using platforms to raise funds by encouraging donations; offering “rewards” (typically a form of the product or service being offered by the company); or trading capital for actual equity shares.
The World Bank notes that in 2016, businesses raised more money from crowdfunding than from venture capital. Up until this point, the vast majority of crowdfunded cash has been raised as debt rather than equity, making this a notable development.
Niche types of crowdfunding platforms emerging, such as those focused on equity crowdfunding as well as those geared towards specific sectors, allowing investors with deep domain knowledge in certain areas to invest with confidence. Beyond SMEs, this presents significant opportunities for investors to bypass what has traditionally been the VC’s niche. For SMEs, the scale of crowdfunding platforms will enable them to reach more investors more quickly, expediting the entire process of accessing capital from a broader range of individuals and entities.
While crowdfunding, particularly equity crowdfunding, is still evolving, it’s safe to say it’s here stay. It is an excellent option for the right type of small businesses — those with a high degree of confidence that they can pay back loans, produce promised rewards and generate strong returns.
Another trend shaping the small-business lending landscape is the rise in cryptocurrency. What began in 2009 with the invention of bitcoin as the first digital asset designed to work as a medium for exchange, has evolved into a global phenomenon. New types of cryptocurrencies are sprouting every day and being used in different ways, including to facilitate cross-border small-business investing.
Fundstrat, a leading financial market strategy and research firm, recently issued a report on digital currency stating, “Bitcoin is an under-owned asset, with a lot of characteristics very similar to gold that will ultimately make it attractive as an alternate currency.”
Cryptocurrency is ideal for cross-border lending in several ways. In addition to being secure and permanent, cryptocurrency transactions allow borrowers and lenders to sidestep time spent working through a bank, as well as converting loans from one currency to another. For many investors, the speed and convenience of cryptocurrency-based transactions presents an opportunity to magnify gains.
Access to finance is a key constraint to SME growth, largely because most small businesses don’t have an established, solid record of revenues to show to lenders.
According to one recent survey conducted by the U.S. National Small Business Association, 27% claimed they haven’t been able to receive the funding they needed. For those one in four businesses, the most frequent primary impact that a lack of funding had was preventing them from growing their business. Even for those that do get funding, the timeliness of that funding is often a problem. Promising startups in developing countries face an even more daunting challenge in gaining access to capital, given limited alternatives to draw upon (personal and family savings) and the absence of financial innovation.
Fortunately, the culmination of several trends has the power to paint a brighter picture for SMEs worldwide. Over the next several years, the interplay of alternative lending, crowdfunding and cryptocurrency is poised to reshape the SME lending landscape, presenting new opportunities for SMEs and investors, as well as established and developing economies around the world.