Saved by online lenders, businesses say they’ll borrow again
Some small businesses forced to turn to online lenders for pandemic relief are making these niche players a bigger part of their financial game plan and are even considering getting rid of their traditional banks altogether.
Loans from online lenders have saved thousands of small business owners who were unable to obtain COVID-19 relief loans from traditional large lenders. Now, encouraged by processing requests in days rather than weeks, these owners are becoming repeat customers.
Patrick Carver was loyal to his big national bank, but became disillusioned after applying for a Paycheck Protection Program loan, going unanswered for over a month, then his request rejected. At a friend’s suggestion, Carver tried an online lender – his application was approved in four days, and he had the money in a week. If he needs another loan, he will start with the Internet.
“Anything related to my business that requires quick action, I’ll probably go with one of those businesses that’s built for speed,” says Carver, owner of Atlanta-based Constellation Marketing.
The recently completed Paycheck Protection Program has granted over 11 million loans worth over $ 788 billion. Banks were inundated with more applications than they used to process, and many large applicants got their loans processed before small businesses.
Some small businesses with established banking relationships were rejected because they did not have the right mix of accounts. Others never heard back or were refused without explanation. Many in desperate need of cash so turned to small banks or online lenders whose target customers are small businesses.
Online lenders and other state-regulated lenders processed nearly 251,000 PPP loans totaling more than $ 6 billion in 2020, according to the Small Business Administration, which approved the loans. In the 2021 round of loans, which ended on May 4, these companies made more than one million loans totaling nearly $ 21 billion. These amounts were only about 1% of the program money, but it was cash that many companies could not get elsewhere.
Ahmande Grimes plans to switch to online banking entirely, not just borrowing. He had considered an online loan before the pandemic, but believed at the time that traditional banks were the best route.
“My experience up to 2020 really opened my eyes to the differences between online banking and traditional banking,” says Grimes, owner of Spartan Financial, a financial services broker in Nashville, Tennessee. When he applied for a relief loan from his two traditional banks, the process seemed as complicated as applying for a mortgage. When he turned to an online lender, his request was quickly accepted and sent to the SBA.
Grimes is investigating online banks that provide checking and other services. Because he does not manage cash in his business, all of his transactions can be done electronically.
“I think there is an online bank with the services we need,” he says.
Speed can make all the difference for a homeowner who needs a loan. A traditional bank loan can take weeks from the time of application until the money arrives. Online lenders don’t have to comply with federal government regulations like banks do, so they can process applications faster, sometimes within hours.
A 2018 study by the Federal Reserve and the Federal Reserve Bank of Cleveland found that homeowners want the relationship a traditional bank can offer – but they love the efficiency offered by online lenders. But there is a downside to the ease and speed offered by online lenders: the cost.
Some online loans carry interest rates that exceed the 20% that business credit cards can carry. Traditional business loans are likely to have rates below 10%. (This was not a problem with the P3: Congress set the rate on all loans under the program at 1%.)
Paying a higher interest rate can make sense, Carver says.
“Money is important, but time is also important,” he says.
There are different estimates of the size of the online business loans market, but it sits well in the tens of billions of dollars and is expected to grow by double-digit percentages over the next few years. Investors and the financial services industry recognize the potential value of online lenders; PayPal, which went public in 2015, has nearly doubled its price since the start of the PPP, compared to a 20% gain in the S&P 500 during the same period. Last year, American Express bought out Kabbage, which offers banking services in addition to loans.
The PPP has raised the profile of online lenders like PayPal and Square, says Karen Mills, who ran the SBA under the Obama administration and is now a researcher at Harvard University. These companies have based their loans on information contained in their own databases, payment histories being one example.
“They were deeply committed to the success and the future of the small business segment, so they looked at them,” says Mills.
When some small business clients of Kruze Consulting encountered obstacles in their banks, the accounting firm recommended that they try online lenders. All of these clients got their loans and had good service.
“They would use these online services again,” says Healy Jones, vice president of the company with offices in California, New York and Texas.
The PPP has been a good learning time for accountants as they have seen widely varying performance from all lenders.
“We really see it as a weighing mechanism to see which banks had the customer service and organizational strengths to help customers during the crisis,” Jones says.
For Grimes, online banks are in the best position to provide him with this kind of help, as they were once startups.
“It was a small business. They understand me. They are me, ”he says.