The alternative lending space is rapidly evolving, and small business owners across the country are seeing how infusions of working capital used for staffing, expansion, marketing, and more, can help them grow.
At the beginning of 2016, we had the pleasure of facilitating a virtual roundtable discussion with experts at some of the leading alternative lending firms. They broke down the top trends in the industry, and provided their thoughts on where our space is going. These insights are a must-read for any small business owner looking to grow this year.
1. Cost of funding
The alternative lending industry is maturing quickly and business owners are getting increased access to growth capital each and every year.
Jay Lee (CMO at Swift Capital): Competition and increasing industry legitimacy are reducing the costs of small business funding for stronger credit counterparties in the alternative lending sector. Today, businesses have multiple alternative lenders vying for their business. This competition is driving yields down for the better credits, but not necessarily for the lower credits.
In addition, traditional banking and securitization markets have increasingly approved of the alternative sector which is a growing source of capital for alternative lenders.
Charles Green (Managing Director at SBFI): We are beginning to see two trends among alternative lenders that are lowering borrowing costs for many small business owners: First, competition in the marketplace is driving many lenders to lower rates for the better deals in order to grow marketshare; and secondly, as some of the more established platforms are forging partnerships with national banks, these costs are going to be lower due to the bank’s cheaper access to capital plus their interest of avoiding the reputational risks associated with exorbitant lending rates.
2. IPOs of lenders
The general expectation is that the market is still very hot on financial technology (FinTech) companies and alternative lenders.
Tom Abel (CEO of Market Street Funders): Venture Capital participation in the sector continued to grow year over year and 2015 ended in a record with almost $10 Billion in investment. VC firms will grow hungrier for returns. 2016 should be a year where we continue to see these FinTech companies go public.
Jay Lee (Swift Capital): Those companies which built their businesses on sound principles, transparency, and trust with customers and investors will continue to enjoy success in the highly underserved and broader market. As the shift from Banks to Alternative lenders gains steam due to the superior customer service and experience there will be further opportunities to tap the IPO market for growth capital in the future.
Expect the largest players in the space to continue their move toward more transparent pricing and disclosure of real interest rates.
Stephen Sheinbaum (Founder of Bizfi): A few decades ago, there was a clothing retailer in New York City who proclaimed that an educated consumer was his best customer. The same can be said for alternative finance and the companies that do the most to help educate their customers will lead this industry.
That means, in part, making it easy for small businesses to compare potential funding options, as we do on the Bizfi platform. It also means making it clear to business owners, before they sign any funding contract, what the terms of the funding will be so that they can prepare their operations for repayment. These are the hallmarks of transparency in alternative finance.
Jay Lee (Swift Capital): When Fundera published an op-ed in Forbes calling for the Online Lending industry to uphold a Borrower’s Bill of Right it was not initiating a new set of promises the industry should uphold, but rather it underscored an already growing strong move in the industry towards transparent terms and true price calculations. This change was well underway, forced by a significant increase in competition and by heightened curiosity from regulators and the CFPB.
4. Integration with banks and traditional lenders
The marriage between banks and alternative lenders will continue to expand in 2016.
Stephen Sheinbaum (Bizfi): I’m not one of those who view traditional banks as the Evil Empire. It’s fun to have a villain in a Hollywood script, but, when you’re talking about funding a small business, it’s not very helpful. Alternative funders and traditional banks each have their strengths and, if they are combined, they can create a better funding environment for small businesses.
The leading FinTech companies have technology that banks need: It will be far more cost-effective for banks to automate underwriting through partnerships than it would be to build their own platforms or modernize legacy systems. The white-label technology and APIs that are being rolled out by some FinTech companies will be a low-cost way of bringing more collaborations between FinTech and more kinds of traditional financial institutions, including the community banks that still serve the bulk of small businesses in many markets. This technology will also make it possible for more entities that provide services to small businesses--such as accountants and trade groups--to also be gateways to funding.
Jay Lee (Swift Capital): There have been some interesting developments between Alternative Lenders and traditional banks – the most notable being the recent announcement between OnDeck and JP Morgan. It will be interesting to see what types of businesses receive funding from this partnership and how other similar partnerships will be structured.
These marriages could take many forms from pure service provider relationships (similar to FDR and TSYS type models) to more co-brand/partnerships – similar to Agent Bank and Co-Brand Card provider partnerships. The key question will be if banks will be willing to experiment with the innovative lending approaches and if customers truly receive the right benefits from these partnerships.
John Zavoyna (CRO at BFS Capital): For years, alternative lenders enjoyed a tumultuous relationship with traditional financial institutions, such as banks and credit unions. All the while, small business lending by traditional financial institutions has been in steady decline over the past 8-10 years as these companies faced a number of cyclical and structural barriers. Now, banks and alternative lenders are learning to work together rather than compete against each other.
Ultimately, banks and alternative lenders are united in their fight to preserve the customer relationship. Small business owners today have countless options when it comes to securing capital, and banks and alternative lenders have a shared interest in making sure small businesses have the resources necessary to continue to grow.
5. Market expansion
Can alternative lenders and brokers grow the market organically?
Tom Abel (Market Street Funders): If trends like lower funding costs, access to bank balance sheets, and distribution through bank partnerships all progress as we anticipate in 2016, then yes, the market will certainly continue to expand. If not, you’ll find the industry continuing to fight over the same old UCC leads and the pressure to grow through “stacking” (where a small business owner has multiple loans against their business) will continue.
Jay Lee (Swift Capital): Competition encourages excellence and continued evolution. It is due to the large number of entrants that the Alternative financing industry continues to expand its product offerings, refine its services and enable more options for customers. The number of competitors is likely to stabilize after the next economic cycle as smaller, less experience players have to weather a test of their portfolios.
Stephen Sheinbaum (Bizfi): Competition is central to the American way of doing business. It helps innovative companies rise to the top, and it will be no different in alternative funding. Competition has driven alternative funding companies to deliver technology that makes it easier, and faster, for small businesses to get the funding they need. It has driven improvements to back-end systems so that funded businesses can more accurately track their repayments. Competition has pushed many alternative finance companies to be more transparent in their operations and to deliver better customer service to the businesses they serve.
Reach out to a Funding Navigator today for a free conversation about these 2016 alternative lending trends and to discuss your business goals.
Stephen Sheinbaum is the founder of Bizfi, the premier FinTech company combining aggregation, funding and a participation marketplace on a single platform for small businesses. Founded in 2005, Bizfi and its family of companies have provided in excess of $1.4 billion in financing to more than 27,000 small businesses in a wide variety of industries across the United States.
Jay Lee is For over 20 years Jay has been focused on marketing and technology in lending, payments, and loyalty companies. Jay joined Swift Capital from Aimia U.S., where he was the Chief Strategy and Commercial Officer. He has also held senior executive positions at American Express, GE Capital, and FleetBoston; and he was a former management consultant at Mitchell Madison Group.
John Zavoyna is the Chief Risk Officer at BFS and has 30+ years of executive and C-level experience with major banking and finance companies. As CRO, he oversees all aspects of Enterprise Risk Management including credit, asset management, operational, legal, regulatory and third-party risk. He previously served as Chief Operating Officer for the Company.
Charles Green is the Managing Director at SBFI.org, which offers resources to business lenders to meet the challenges of client financing, industry changes and career advancement. Charles is an experienced commercial lender with more than 35 years’ experience, primarily focused on funding the small business sector.
Tom Abel is the founder of Market Street Funders. Prior to that, he was the Chief Operating Officer of Swift Capital, a recognized leader in the alternative lending industry. He also served as Executive Vice President and Director of Small Business Banking at MBNA America and then Bank of America. Tom is a small business owner, entrepreneur, and participant in several early stage ventures.