Small Business Loan Alternatives: An Introduction to Small Business Lending Platforms

Since the financial crisis, small business owners have had a difficult time obtaining loans to start, expand, or finance their business. Applying for a loan through a bank or other traditional sources is often a lengthy, difficult, and frustrating process.  P2P small business lending and other marketplace lending platforms are offering attractive alternatives.

Small business loans are often defined as business loans that are below $1 million.  For banks, these loans are far less profitable and carry much more risk competitive to large business loans, thus making loans for small business harder to get. .  As a result, loans from small banks are harder to get, as over half of small business are seeking loans of under $100,000, which big banks simply don’t see worth the time or risk.

To fill this gap, non-traditional lenders in peer-to-peer and marketplace lending have found efficient ways of providing the needed capital to small businesses with greater efficiency. Tech-based lending platforms like Funding Circle, OnDeck, and Lending Club are emerging, providing small businesses with attractive loan alternatives to banks.

Small business loan platforms have a faster turn around and are much smaller in volume comparative to banks. Most small business loan platforms offer loans between $25,000 and $500,000, with terms between 6 to 60 months, whereas loans from banks typically have larger sizes of up to $5 million with terms anywhere from 2 to 25 years.  By employing data-driven algorithms and utilizing the latest technology, borrowers are able to be screened and loans processed rapidly.

When banks assess potential borrowers, where you sit often determines where you stand – meaning if you don’t have a very high credit score, you’re stuck.  Peer-to-peer platforms take a number of factors in to consideration when assessing a potential borrower- not just their credit score.  Factors like location, industry, time in business, annual revenue, potential and performance are all analyzed.  Quick funding, mobile applications and simple screening process are crucial, competitive advantages.  “We present an important, generational shift in how borrowers of all types can get access to the finance they need to achieve their aspirations.” stated Sam Hodges of Funding Circle in a recent interview with P2P Lending Fund Manager Prime Meridian Capital Management.

P2P Small business lending volumes continue to grow at an incredible rate. In 2015 Funding Circle is expected to originate over $250 million in small business loans which more than double that in 2014. A paradigm shift is clearly in the making as the small business loan industry through p2p/marketplace lending platforms continues to grow.

Don Davis is a Managing Partner and Portfolio Manager of Prime Meridian Capital Management, an early adopter P2P/online lending investment management firm which manages the Prime Meridian Income Fund and Prime Meridian Small Business Lending Fund, and has an established track record of outperforming P2P lending platforms.