The Brave 100: The Battle for Supremacy in Small Business Lending, a recent report by Frank Rotman at QED Investors, and Peter Carroll and Jonathan Liu at Oliver Wyman, pits fintech start-up and alternative lenders like OnDeck, Lending Club and Fundera (the Brave 100) as David’s battling the Goliaths of the SMB lending world: the large banks.
They point out that in the battle to acquire small business borrowers, banks have a significant advantage in their favor, namely that many already have a relationship with those prospective customers:
100% of them (business owners) have a primary checking account with a Bank. 100%!
…two thirds of those who do borrow get their credit from their primary Bank.
But they also acknowledge that the upstarts have had some success, in part because they are often willing to make smaller and short-term loans, which banks haven’t shown a great deal of interest in making. And alternative lenders often process and fund loans faster; in hours or days, compared to the weeks or months it may take to get some bank loans.
The report’s authors also raise a question about whether the spoils they are fighting for are as rich as first thought. While there are 26 million small businesses in America, a smaller subset needs loans.
Most Small Businesses don’t borrow because they don’t need to and they don’t want to.
The Oliver-Wyman survey of 1500 business owners did identify one pain point that plagues about half of all small business owners: cash flow volatility.
Almost half said they experience occasional or frequent shortfalls
When asked, there was significant interest in a product that would help borrowers manage cash flow fluctuations, and again, the first place they would expect to get that product would be from their bank. By tapping into the intelligence banks already have about their customers, their cost of acquisition could be negligible.
In the meantime, PayPal Working Capital has facilitated more than $1 billion in credit to small and medium-sized businesses since it launched two years ago, by tapping into information about customers using its payment platform, and Square reports it has extended more than $225 million in financing (advancing more than $1 million each day) through Square Capital.
And while this may seem like a David v. Goliath fight, with two clear opponents, the reality is far more complex, and messier.
In the United States alone there are at least 100 non-Bank Small Business lenders that have emerged in recent years and more are being launched every month.
That raises the question: is this battle helping small business owners? There are over forty-four different types of financing available to small businesses, through hundreds of lenders and brokers. Pricing isn’t always transparent, making it difficult to compare rates and terms. For those caught in the crossfire, the result can be confusion or overwhelm. Or just as likely, the best marketer gets the business, regardless of whether that produce is best for the borrower.
So where does that leave a company like Nav, that is neither a bank nor an alternative lender, but is squarely on the field as this battle rages?
We like to think of ourselves as the medics, helping the innocent bystanders caught in this skirmish. Our goal is not to take sides, but to help these onlookers diagnose and improve their how they look to lenders (regardless of which data is being used to judge them) and guide them out of harm’s way and to the best small business loan or financing product–whether that comes from a bank or an alternative lender–so they can lead long, healthy business lives. We plan to be there as long as we’re needed.
This article was originally written on November 5, 2015 and updated on January 20, 2021.