Banks are still not doing a job in supporting small business lending, says a Research by Funding Circle, the P2P market operator for moneylenders. And that explains why fintechs dedicated to small business lending are taking over SMB loaning and getting a pat on the back for it.
Funding Circle discovered SMB lending accounts for only 0.7% of the total balance sheets of banks in the US. The UK is way better at 2%, and we are comparable to the Netherlands at 0.6%.
These figures are dreadful because banks have been putting more efforts to attract microbusiness owners over the past few months.
According to Bernardo Martinez of Funding Circle, there’s a “unique characteristic about small businesses that make them less attractive to banks.”
“Micro-business lending isn’t as money-making as many other businesses banks do. Yet this is a customer segment that can only benefit you if you really pay attention to it.” He says.
This lack of centration by big banks has open the doors for FinTechs to take over microbusiness loaning. No wonder investors are staking millions of dollars on startups pursuing this market.
As we speak, Funding Circle has raked in $1.7 billion in funding in the course of ten rounds. We have US microbusiness loans outstanding than nearly 98% of FDIC-insured banks, says Martinez.
Kabbage publicized a month ago that it had finalized a $700 million asset-backed securitization which is the largest ever made by an online microbusiness lender.
Why are banks still missing the mark?
Pricing, Underwriting, and Approval!
In part, we could blame the banks’ exorbitant rates, demanding underwriting procedures and low acceptance rates for this poor performance.
Small businesses surveyed by Funding Circle said bank loans have the worst terms compared to other forms of funding.
Plus, they approve you to access only a limited amount of financing, and only after subjecting you to thorough qualification checks.
According to a Federal Reserve study titled Senior Loan Officer Survey, 24.7% of banks reduced the interest rate on loans they issue to medium and large businesses. Yet, only13.9% of banks eased the rates for small businesses.
The above figures show negligence among banks because other statistics by the Fed Reserve showed that loans under $100,000 are still the major contributors to the growing business lending.
FinTechs offer instant money to business when they want it.
Funding Circle said one-third of the microbusinesses it surveyed said up to eight hours to apply for a bank loan and up to another month to find out if they qualified.
Delay was cited by an entire 74% of the respondents as the reason they do not apply for bank loans.
In contrast, “Funding Circle allows applicants to apply in minutes and loans come in as quick as five days.” Says Martinez.
Banks need to pull up their socks here. They have the financial resources, yet they are ignoring a customer segment that not only needs funding but also has a great potential to move the economy.
Author bio: As the FAM account executive, Michael Hollis has funded millions by using business cash advance bad credit solutions. His experience and extensive knowledge of the industry has made him finance expert at First American Merchant.