How online lenders are changing business loans


The small business lending market in the United States is estimated to be worth around $180 billion. That’s a lot of money — it’s enough to give a loan of $287,000 to each of the 627,000 small businesses that are established each year. It’s not enough, though: a report by Oliver Wyman estimates that there is an additional demand for credit ($80 to $120 billion) that isn’t being met.

Online lenders, seeking to fill this obvious hole in the market, have been <a href=">growing rapidly</a>. Keep reading to find out why they’re growing, where they’re succeeding, and what they need to do in order to become the lending solution that entrepreneurs and small business owners need.

Why small businesses need loans

According to Fundera’s 2017 State of Business Lending report, half of the small business owners surveyed said they took out a loan for working capital. Purchasing equipment and expansion were also top reasons for taking out loans. That’s because most businesses need capital to get started and grow.

Since it’s hard to get a loan, many business owners rely on their personal savings (along with money from friends and family) when they first start out. According to a recent Wall Street Journal analysis of U.S. Census data, more than 60% of firms less than two years old used personal or family savings to start their business.

Self-funding isn’t an option for everyone, though — many entrepreneurs don’t have enough personal savings or family capital to start a business. And even if it is an option, it might not be the best one: using your personal savings or credit opens you up to personal liability. That means there’s a huge, unmet need for small business loans — especially for businesses that are just starting out.

Why it’s hard to get a loan for your small business

The small business lending market is grossly underserved. Even in the strongest credit markets, many small businesses receive no credit or less than 50 percent of the amount they requested.

Why? Well, it partly comes down to the money. Many lenders don’t prioritize serving small businesses because they don’t think that doing so is sufficiently profitable.

  • Small businesses want small loans, meaning the lenders can’t earn as much from each loan. According to the same analysis of U.S. Census data, 70 percent of small businesses are looking for loans of under $250,000, and more than 60 percent want loans of under $100,000.

  • Lenders may have a hard time accessing risk when they look at a loan application for a small business, since there may not be any long-term records of their spending, revenue, and credit. As a result, small businesses have a much harder time getting credit than their larger counterparts. According to a 2015 study by the Federal Reserve, businesses with revenue under $100,000 per year were half as likely to be approved for a loan than businesses with revenue over 10 billion.

How online lenders are trying to solve the problem

Since the traditional lending market clearly isn’t meeting the needs of small business owners, entrepreneurs are turning to alternatives, including online lenders.

The online small business lending market is growing rapidly, and online lenders do offer a valuable service by offering loans to entrepreneurs who need capital quickly or who can’t get a loan from other lenders. However, it’s important to research online lenders carefully before choosing one; some online lenders have higher rates or less-than-favorable repayment terms.

It’s clear that traditional banks and lenders are not meeting the lending needs of the small business community. Online lenders have an opportunity to be the solution, but there are a few specific steps they’ll need to take to get there:

  • Find smarter ways to assess risk for businesses with limited financial data or history.

  • Increase customer satisfaction by offering competitive, appealing rates and terms.

  • Show potential customers that loans can be an affordable, accessible option for funding their business.

  • Lower customer acquisition costs by doing all of the above.

As your business continues to grow, there may come a point when access to capital could fuel that growth. Knowing the options will let you make the best choice for your business. It’s a rapidly-changing, exciting time for small businesses, and staying up-to-date can give you the edge you need to succeed.

This post was written by Abigail Schneider, from Azlo’s product team, as part of her market research on small business lending.

Hi there! This post exists to offer you (hopefully) useful information but it cannot take the place of personalized professional advice. Please consult a qualified expert if you have questions about your business. Also, Azlo doesn’t endorse any third-party sites that are linked here.

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