No wonder fintechs catering to small businesses are getting so much attention. A decade after the recession and they are still underserved by the nation’s biggest banks.
That’s according to new research from Funding Circle, the peer-to-peer marketplace operator for lenders. It found SMB lending accounts for just 0.7% of the overall balance sheets of U.S. banks. That stands at 2% in the UK and 0.6% in the Netherlands. And that’s with the banks stepping up their efforts to woo small business owners in recent months.
“There are challenges unique to this customer segment that makes it less attractive to banks,” said Bernardo Martinez, U.S. managing director at Funding Circle. “Small business lending is simply less profitable for a bank than some of their other business lines. This is not an area where you can succeed unless you really focus on it.”
The lack of focus from big banks presents a huge opportunity for the fintechs. It's one that hasn’t been lost on investors who have poured millions of dollars into startups going after this market. To date, Funding Circle has raised $1.7 billion in funding over the course of ten rounds. Funding Circle now has more U.S. small business loans outstanding than close to 98% of FDIC-insured banks, said Martinez. Earlier this month rival Kabbage, the fintech for small businesses, announced it closed a $700 million asset-backed securitization, which it said it the largest by a small business online lending platform.
The lack of success on the part of banks in the small business lending market of late could lie in the way the banks' price, underwrite and approve loans. Funding Circle found in its survey small businesses tend to receive terms on loans from banks that are worse than their larger rivals. They also have access to less financing and face approval standards that are more stringent. The Federal Reserve’s most recent Senior Loan Officer Survey backs up Funding Circle’s claims. It found 24.7% of banks eased the interest rate they charge on loans to medium and large firms. That compares to 13.9% of banks that did the same for small businesses. That’s despite growth in business lending is being driven by loans of under $100,000.
Fintechs also win in terms of speed. According to Funding Circle one-third of small business owners polled said it took eight hours on average to apply for a loan with a bank and at least another month to find out if they were approved. It was cited by the majority of respondents as the reason they chose not to apply for a bank loan.
“In the U.S., far and away the No. 1 reason why SMBs came to us before a bank was because they thought the decision would have taken too long or that it would have been too much hassle,” said the Funding Circle executive. “Seventy-four percent of all SMBs we surveyed cited this as a reason. Ten percent of SMBs surveyed thought their bank loan would be rejected, 5% simply didn’t know how to approach a bank, and 3% thought a bank loan would be too expensive. So yes, it’s absolutely an access issue but goes a few levels deeper.” Funding Circle has an application that takes ten minutes to complete with approval in around twenty-four hours after the document is submitted. Funding is in about five days. Rival fintech lenders offer a speedy turnaround on small business loans as well.
Fintechs also appear to have the messaging down when it comes to targeting small business owners. The group has long been rejected by banks and are in need of capital, and fintechs know that. Wooing them isn’t too hard as a result. Of Funding Circle’s new customers, Martinez said 73% were taking out their first business loan. In 2015 20% of small business applied for an online loan. That increased to 24% two years later. It’s particularly popular with the smallest of the small businesses. Funding Circle found 27% of businesses with one to nine employees used an online lender in 2017. Only 11% of businesses with more than 50 employees chose that funding route. “More and more small businesses recognize that banks can’t meet their needs and now turn to alternative borrowing options without ever approaching banks,” said Martinez. “They are the lifeblood of the U.S. economy and following healthy economic growth in 2018, their appetite for external financing is as strong as ever.”
