Sep 3, 2015

How Innovation Changed the World of Business Financing for Good

Nothing in the world sounds as boring, non-tech-oriented, and archaic as business financing. This conception has been true for decades, but now disruption comes and abolishes that point of view. New type of lenders, which we will refer to as "online lenders", are using technology turn this seemingly painful process into a nothing more than a breeze in the wind.

How Online Lenders Simplify Processes

If you ever taken a business bank loan, you know what the process entails. It starts off with the basic documentation of your businesses (some legal letters), and continues with up to several months of back and forth asking you to supply more documents and more information. Your business will undergo the most detailed scrutinization by the bank's officials, and whether you'll get your funding relies heavily on your business' credit score, your personal credit score, and the securities you're willing to bring.

In volatile financial times there's a direct impact on lending, which never got to the way it was pre-2008. The same applies for business loans and even to a greater extent, not to mention small and medium businesses (SME) which often require small bridging loans to stabilize cash-flow and thus less than $50,000.

Bank don't want to deal with anything they consider high risk, and especially small businesses and bad credit businesses. Even great borrowers which have clean history are required to supply security / collateral (same thing).

In short, it's difficult to borrow money from banks, very time consuming, and in many case you'll face a rejection.

Online lenders follow the same basic principles all lenders (including banks) use, but they offer a lot more flexibility and require a lot less information to make an informed decision.

Process: The process is especially easily for online sellers. Those can connect many of the online lenders platform (like Fundbox) directly into their invoicing software, or connect lenders like EzBob directly to their Paypal accounts. Instead of providing documents showing how business is like, and waiting for a staff of analysts to provide their opinion and reply - it's all done automatically by an algorithm.

Each one of the companies has its own secret sauce, and the most profitable ones will be the ones assessing risk in the most accurate way, but we can assume the basics are somewhat alike. We do know for a fact many of these companies don't use the credit score parameters at all, and that will allow bad credit borrowers a fairer chance of getting their loan approved.

Within minutes, hours, or several days, the borrower will receive a reply, with its own custom loan terms. Some platforms that are willing to bear risk will accept even the worst borrowers, but will charge very high interest, and also ask for securities, while others will be more picky on which business they'll work with, but will provide their lending unsecured.

Public Acceptance

Public acceptance is at its top, after Lending Club has been floated for a staggering sum of 10bn (at peak), making it the second largest IPO of 2014, except Ali Baba of course. Some companies even receive government funding, and in general it seems like the public view is that this sort of lending can aid small businesses with their everlasting struggle for financing options.

We anticipate more IPO's relating to alternative lenders this year (OnDeck is also now a public company), and a lot more information, good and bad, popping about the topic.

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