How can your bank stay competitive in the business loan market?
Do you compete with online lenders? According to recent data compiled by the Small Business Credit Survey, “applications to online lenders continue to trend upward: 32% of applicants turned to online lenders in 2018, up from 24% in 2017, and 19% in 2016.” Despite this data, applicants continue to be less satisfied with online lenders compared to banks. So what is a banker to do? At WomenVenture, we’ve been asking ourselves this same question for the past few years. There are a couple of steps we can take to help our clients and maintain a competitive advantage over online lenders.
The first step is educating ourselves and our clients on common online lending practices. Online loans and merchant loans are grossly underregulated, so there is a strong “buyer beware” component for business owners seeking quick and easy funding. The terms and cost of funds from online lenders can sometimes sink an unsuspecting business. Effective interest rates can vary from 20% to 75%, and sometimes over 310% according to a study by Woodstock Institute. Here are the terms of a loan from CAN Capital that they analyzed: $18,584 disbursed to the business, $5,705 in fees, and $99/day payments. That’s about $2,200/month at an annualized rate of 60%.
So why do borrowers keep going back to these online lenders? Ease and speed. Most online lenders use technology to determine outcomes, speeding up the process. If you have been in business 6-12 months with annual revenues over $50k, you can likely find funding with only a tax ID, personal ID, and bank statements – and have money in your hand 24-48 hours later. But can a $50k/year business afford $2,200 monthly payments? Unlikely – forcing them to go back and borrow more from the same source.
Merchant advance loans have a similar effect. One of our clients recently borrowed $33k from Square Capital. The fee was $4k and her payments were 10% of her credit card sales, or about $5,300/mo. The payments are deducted before her merchant sales hit her bank account. She was able to pay off the merchant loan in 7 months, but not without worry and concern about making payroll and paying rent. These are the horror stories we all want to save our customers from.
As lenders, we can work with our clients to show them the whole picture of these online lending deals. Through education, we can work with business owners to determine the best lending structure for their needs and help them think through the long-term benefits and consequences. If bankers can educate their clients, they will likely think twice about the ‘too good to be true’ solution and allow their own bank the opportunity to provide more affordable solutions.
Another step toward helping your clients and maintaining market share in this environment is working to meet clients where they’re at. What is your bank doing to compete with the ease and speed of online lenders? Is there a technology product that can grow your assets without too much risk? Technology-driven decision processes are here to stay. What can your bank offer to borrowers in need of a quick loan?
-Jason Burak, Senior Loan Officer at WomenVenture