Funding Circle Finds Banks Are Doing A Bad Job Lending To Small Businesses
No wonder small business fintechs are getting so much attention. A decade after the recession, they are still underserved by the country’s largest banks.
That’s according to a new study from Funding Circle, the peer-to-peer market operator for lenders. He found that loans to SMEs made up only 0.7% of the overall balance sheet of US banks. This amounts to 2% in the UK and 0.6% in the Netherlands. And it’s with the banks that have stepped up their efforts to court small business owners in recent months.
“There are challenges specific to this customer segment that make it less attractive to banks,” said Bernardo Martinez, US Managing Director of Funding Circle. “Small business loans are simply less profitable for a bank than some of their other lines of business. This is not an area where you can be successful unless you really focus on it. “
The lack of concentration of the big banks presents a huge opportunity for fintechs. This is one that has not been lost on investors who have invested millions of dollars in startups that are tackling this market. To date, Funding Circle has raised $ 1.7 billion in funding over ten rounds. Funding Circle now has more US small business loans outstanding than nearly 98% of FDIC-insured banks, Martinez said. Earlier this month, his rival Kabbage, the small-business fintech, announced the closing of a $ 700 million asset-backed securitization, which he said is the largest of a platform of online small business loan.
The lack of success of banks in the small business lending market of late could lie in the way banks secure, underwrite and approve loans. Funding Circle found in its survey that small businesses tend to receive loans from banks that are worse than their biggest rivals. They also have access to less funding and face stricter approval standards. The most recent from the Federal Reserve Survey of senior loan officers supports Funding Circle claims. He revealed that 24.7% of banks have relaxed the interest rate they charge on loans to medium and large businesses. This compares to 13.9% of banks who have done the same for small businesses. This is despite the growth in business loans being driven by loans under $ 100,000.
FinTechs are also gaining speed. According to Funding Circle, a third of small business owners surveyed said it took them eight hours on average to apply for a loan from a bank and at least a month to find out if they were approved. It was cited by the majority of respondents as the reason they chose not to apply for a bank loan.
“In the United States, the main reason SMEs came to us before a bank was by far because they thought the decision would have taken too long or that it would have been too complicated,” said the head of Funding Circle. “Seventy-four percent of all SMEs we surveyed cited this reason. Ten percent of the SMEs surveyed thought their bank loan would be rejected, 5% just didn’t know how to approach a bank, and 3% thought a bank loan would be too expensive. So yes, it is absolutely an access problem, but it goes a little further. Funding Circle has an application that takes ten minutes to complete with approval in approximately twenty-four hours after submitting the document. Funding is in about five days. Competing fintech lenders also offer quick turnaround in small business loans.
Fintechs also seem to get the message when it comes to targeting small business owners. The group has long been rejected by the banks and needs capital, and the fintechs know it. Courting them is therefore not too difficult. Of Funding Circle’s new clients, Martinez said 73% were taking out their first business loan. In 2015, 20% of small businesses applied for a loan online. This figure rose to 24% two years later. It is especially popular with smaller small businesses. Funding Circle found that 27% of businesses with one to nine employees used an online lender in 2017. Only 11% of businesses with more than 50 employees chose this funding route. “More and more small businesses recognize that banks cannot meet their needs and are now looking to alternative borrowing options without ever going to banks,” Martinez said. “They are the lifeblood of the US economy and after healthy economic growth in 2018, their appetite for external financing is stronger than ever.”