Fast capital: Friend or foe to small business?
Anthony Price
We live in a society where speed is the norm: fast food, fast service, fast fashion and fast cars — Tesla's Model S P85D electric car has a “ludicrous” mode that rockets the car from 0 to 60 mph in a jaw-dropping 2.3 seconds. Industry innovators such as FedEx and Amazon set the standard, leading consumers and businesses alike to expect lightning fast service. When we don't receive something swiftly, our universe seems off-kilter.
If fast is the new norm, why should millions of small businesses wait months for a business loan? Banking traditionally has been an industry where the standard was certainty, not speed. Banks have always embraced slow and steady as their motto when it comes to lending to small businesses. But slow is no longer acceptable to hungry businesses eager to compete at the speed of global commerce.
The lending game changed during the Great Recession. As the country wrestled with how to get the economy off the cliff and onto solid ground, banks consciously dialed back their lending to small businesses. The Federal Reserve Bank of Cleveland reported that the number of bank loans under $1 million, mostly small business loans, dropped from 2008 to 2012. Small business loans are down almost 18 percent to $543 billion from their peak before the recession of $659 billion, based on national data. Bankers argue that increased regulation added unreasonable costs, making small business lending less attractive and riskier compared to the alternatives available.
The Feds' Joint Small Business Credit Survey Report found that, on average, small businesses spend 24 hours researching and applying for a loan. In contrast, banks take up to 60 days to close a new business loan. Adding salt to the wound: Some Small Business Administration (SBA) guaranteed loans could take up to 90 days. Small business cannot wait.
Seeing an opportunity to get into an almost $1 trillion industry, new nonbank companies are filling the void for loans under $150,000. These companies lend to businesses that banks reject because they lack stellar credit, long operating histories and/or collateral. A Bloomberg BusinessWeek article stated that merchant cash advances, a type of loan based on a business' credit card processing revenue, surpassed the SBA last year as the No. 1 source for loans under $150,000.
Armed with boatloads of capital from Wall Street and venture capital funds, new companies began lending via the Internet using sophisticated computer algorithms to underwrite loans within hours, not months. For the most part, this fast capital is not regulated or covered by consumer protection laws.
What you have today is an industry tripping over itself to lend money quickly to small businesses at very high interest rates. The commotion attracted the interest of the U.S. Treasury, which recently asked On Deck Capital, a poster child for the new nonbank lenders, and a public company since 2014, for information on online marketplace lending.
For some, these new capital products can be both a godsend and a curse. If meeting payroll is a concern today, a fast loan tomorrow helps. But when cash is withdrawn daily from a business owner's bank account to pay back the loan, the business sees the true cost.
Fewer dollars make it to the bottom line because the interest rate often exceeds the rates of credit cards. For example, On Deck's asset securitization that it sold to investors last year contained a portfolio of loans with annual percentage rates as high as 134.4 percent.
Access to capital is a conundrum. The long-term solution is not on the horizon, but it seems likely that fast capital is here to stay. In the end, when fast capital comes calling, business owners must do their homework, because fast does not come cheap. n
Anthony Price is the CEO of LootScout, which counsels small businesses how to raise capital. You can reach him at Anthony@LootScout.com.
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