I found an interesting article in the Wall Street Journal on Alternative Lenders to small businesses. Some highlights with comments.
With Credit for Businesses Tight, Nonbank Lenders Offer Financing at a Price
When Khien Nguyen needed $180,000 to open his 13th nail salon near Philadelphia in November, he didn’t go to a bank. Mr. Nguyen’s credit score had dropped during the recession, so he figured a bank would put him through weeks of aggravation, then reject him.
He turned instead to one of the nonbank, short-term lenders that have been gaining traction since the financial crisis. The lenders cater to small businesses, often at high cost.
Delaware-based Swift Capital reviewed his financial records and social-media sites such as Yelp and Facebook for reviews, then dispatched someone to one of his salons to pose as a customer. Swift wired him the money a few days later….
About two dozen such nonbank lenders—including OnDeck Capital Inc., Kabbage Inc. and CAN Capital Inc.—lent about $3 billion collectively last year, double the 2012 total…
Banks generally require solid credit scores and spend weeks reviewing financial statements, tax returns and business plans.
This is one interesting theme of the article – use of social media and other internet data mining to develop information about credit worthiness and move quickly.
Biz2Credit, an online loan broker for small businesses, says an analysis of loan applications made in December through its website showed big banks approved 18% of loan applications by its customers in December, while small banks approved 49%.
Various nontraditional lenders have stepped into the void…
Alternative lending to small businesses expanded during the financial crisis as bank credit dried up….
In 2008, when the financial crisis hit, sales at Robin’s Nest Floral and Garden Center in Easton, Md., dropped by 15%, according to owner Ken Morgan. The 30-year-old company needed $50,000 for a shipment of Christmas decorations. “I went to the bank, where I’d always done business on a handshake, and they were scared and having their belts tightened,” he says. He was turned down. …
It is so heartwarming as an economist to see, even if slowly, all the adjustments we expect. Banks not lending (or forced not to lend)? Someone will start a new business model to fill in the void.
But there is nothing that stops a bank from using new sources of information, streamlining loan approvals and so forth. So if regular banks are not doing it, and if new businesses that want to serve this market are organizing as something other than new “banks,” it raises the interesting question, what’s wrong with regulation or competition in banking?
Mr. Nguyen is paying 14.9% interest over the loan’s six-month term—the equivalent of about 30% annually …
Interest rates on such loans can run in excess of 50%, on an annualized basis, much higher than on conventional bank loans. Usury laws limiting interest rates generally don’t apply to the short-term lenders. Some of the loans are originated in states that don’t cap interest rates on commercial loans. Others are structured as private contracts between two businesses. …
Ah, usury, predatory lending consumer protection and all that. That gives us a hint here of the regulatory roadblocks. Now we know why the loans are short term. Wouldn’t it be nice if Mr. Nguyen could get a long term loan?
For small and very short loans, quoting the price as an annualized interest rate doesn’t really make much sense. The fixed cost of the transaction and the fixed, non-time dependent, probability of repayment seems much more important.
Speaking at a recent Small Business Administration conference, Treasury Secretary Jack Lew said the government wants to “do more to knock down barriers to financing,” …
Hmm. I’m curious which barriers he has in mind, and how many are erected by the self-same government. Isn’t the same government behind tightening bank lending standards, limits on bank entry causing these new businesses to have to spring up, interest rate caps, “consumer protection” and more?
Peer-to-peer online-lending platforms channel funds from ordinary investors to borrowers. Private investment partnerships, including hedge funds, make direct loans to struggling businesses, often with costly strings attached. …
Unlike banks, the short-term lenders don’t take deposits, so they need other sources of capital to fund the loans. OnDeck has an $80 million credit facility from a syndicate that includes Goldman Sachs Group Inc.“They have a successful business model that we like,” says a Goldman spokesman.
This fall, OnDeck secured another $130 million from, among others, KeyCorp. Adam Warner, president of Key Equipment Finance, says loans to OnDeck and to CAN Capital are “a way to diversify our small-business lending.”
I found this especially interesting. It’s often said that banks just must “transform” deposits to loans, that there is something eternal and magical about deposit funding for risky business lending. Not true apparently, and that gives me heart for my view that real banks could support lending just fine if they had to raise money as equity or long term, non-runnable debt. I wish the article had more about the capital structure of these “banks.”
