For small-business owners seeking capital, the U.S. business funding landscape is more welcoming today than it's been in years. According to the Biz2Credit Small Business Lending Index, in August 2019 approval rates for small business loan applications hit a post-recession record.
Big banks with over $10 billion in assets approved 27.8 percent of small business applications, according to the online funding marketplace, which analyzed 1,000 small business loan applications on its website. The data also showed small banks okayed more than 50 percent of small business applications.
In addition to higher loan approval rates, borrowers also benefit from greater choice, says Steve Denis, executive director of the Small Business Finance Association, a Washington, D.C. trade group for alternative lenders.
“There are just so many more options available for small-business owners," Denis says. “There are a lot of different terms and payback types."
Lenders today look at many other variables besides the business and personal credit scores that have traditionally determined who gets financing, adds Susan Scherreik, director of the Center for Entrepreneurial Studies at Seton Hall University.
“They have more access to capital because the online and mobile lenders are using algorithms and AI, and they may be looking at a business's online presence such as how many likes they're getting and reviews of the business—things convention lenders don't look at," Scherreik says.
In addition to providing more access and more choices, today U.S. business funding moves faster, Denis adds.
“The most important factor to a lot of small businesses is how quickly they can get funded," he says. “Due to regulation, it can take traditional banks 30 days to close a loan. Most of our members can do it same day if the information provided is full and accurate."
What Changes in U.S Business Funding Could Mean
Speedier processing and improved approval rates are all meaningful changes for small-business borrowers. But perhaps most significant is that today, small businesses that might have been shut out of financing are winning approval for their credit requests.
According to a July 2019 study of loans from six alternative lenders analyzed by nonprofit research organization FinRegLab, when lenders use cash-flow data to determine creditworthiness, it improves access to credit for some groups that have historically been denied it, including businesses with low credit scores, minority businesses and low-income borrowers.
The same solid principles that a small business has always used to determine their lending needs are still in place. You still have to look at all the lenders and examine what type of loan you need.
—Susan Scherreik, director, The Center for Entrepreneurial Studies at Seton Hall University
For instance, the FinRegLab study, The Use of Cash-Flow Data in Underwriting Credit, found "roughly 45 percent to 50 percent" of borrowers approved by these lenders had credit scores below 650—a cutoff level for funding at many lenders, while "the percentage of their borrowers below approximately 600 ranged from 0 to 25 percent."
Also, out of the six participants, three "served substantial populations" in areas that were underserved by financial institutions. Those three participants had "28 percent to 64 percent of their borrowers residing in 'majority minority' zip codes and 8 percent to 29 percent in 'predominantly minority' zip codes, respectively," the study found.
And for the two lenders "that provided loan level data... 59 percent of borrowers for the one participant and 83 percent of borrowers for the other earned less than the median income for their geographies."
Scherreik adds that the change in the business funding landscape may particularly benefit groups such as minority and women entrepreneurs who have felt lenders were biased against them.
“Online and mobile banking helps take away those biases," she explains.
How to Respond to the Changes
When considering how to respond to the evolving U.S. business funding landscape, small-business borrowers can start by expanding the number of places they search for capital. They can anticipate having more ways to qualify for a loan, and they may have even more access to capital.
“The caveat here is, fintech aside, the same solid principles that a small business has always used to determine their lending needs are still in place," Scherreik says. “You still have to look at all the lenders and examine what type of loan you need. Just because there's more access to capital doesn't mean you gleefully take on more loans. That's something that's always been true."
If funding still proves elusive, there's a good chance that future developments will expand its availability to include even more businesses. The rapid evolution of the business funding landscape in recent years may be only a precursor to even greater innovation.
“I think a lot more change is ahead," Scherreik says. “We'll see more streamlining of regulations. And as the technology improves, with machine learning and AI algorithms that can quickly sort through and analyze data on small businesses, it will create a more efficient market."
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