NEW YORK. Some small businesses, forced to turn to online lenders to tackle the pandemic, are making these niche players a larger part of their financial game plan and are even considering ditching their traditional banks altogether.
Loans from online lenders have saved thousands of small business owners who were unable to obtain coronavirus loans from large traditional lenders. Now, encouraged by the fact that applications are processed in days rather than weeks, these owners are becoming repeat customers.
Speed can be a deciding factor for an owner in need of a loan. A traditional bank loan can take several weeks between application and receipt of money. Online lenders are not required to comply with federal government regulations as banks do, so they can process applications faster, sometimes within hours.
Patrick Carver was loyal to his major national bank but became disaffected after applying for a payroll protection loan without receiving a response for a month, and then his application was rejected. At the suggestion of a friend, Carver tried the services of an online lender – his application was approved in four days, and he had money within a week. If he needs another loan, he will start from the Internet.
“Anything related to my business that requires quick action, I’ll most likely choose one of these speed-focused companies,” says Carver, owner of Constellation Marketing in Atlanta.
More than 11 million loans worth more than $ 788 billion have been disbursed under the recently concluded payroll protection program. Banks were overwhelmed with more applications than they were used to processing, and many larger applicants received their loans earlier than small businesses.
Some small companies with established banking relationships were turned down because they did not have the correct set of accounts. Others were never answered, or were refused without explanation. Many were desperate for cash and then turned to small banks or online lenders targeting small businesses.
Online and other government-regulated lenders processed about 251,000 loans under the Payroll Protection Program totaling more than $ 6 billion in 2020, according to the Small Business Administration, which approved these loans. In the 2021 round of lending, which ended on May 4, these companies provided over 1 million loans totaling nearly $ 21 billion. These dollar amounts represented only about 1% of the program’s money, but it was money that many companies could not get elsewhere.
Ahmanda Grimes is considering a full transition to online banking, not just for loans. He considered getting an online loan before the pandemic, but at the time believed that traditional banks were the best way to go.
“My experience through 2020 really opened my eyes to the differences between online banking and traditional banking,” says Grimes, who owns Spartan Financial, a financial services broker in Nashville, Tennessee. banks, the process seemed as complicated as applying for a mortgage. When he approached an online lender, his application was quickly accepted and sent to the Small Business Administration.
Grimes is researching online banks that provide checks and other services. Since he does not deal with cash in his business, all of his transactions can be carried out electronically.
“I believe there is an online bank with the services we need,” he says.
A 2018 study by the Federal Reserve and the Federal Reserve Bank of Cleveland found that owners want the relationship that a traditional bank can offer, but they love the efficiency offered by online lenders. But the simplicity and speed that online lenders offer has a downside: cost.
Some online loans have interest rates in excess of 20% business credit cards. Traditional business loans are likely to have rates below 10%. (This was not an issue with the Payroll Protection Program: Congress set the rate for all loans under the program at 1%.)
Carver thinks a higher interest rate makes sense.
“Money is important, but time is also important,” he says.
There are various estimates of the size of the online business lending market, but it is in the tens of billions of dollars and is expected to grow by double-digit percentages over the next few years.
The payroll protection program has raised the profile of online lenders such as PayPal and Square, said Karen Mills, who headed the Obama administration’s Small Business Administration and is now a research fellow at Harvard University. These companies based their lending on information contained in their own databases, such as payment history.
Online banks are best at giving him the help he needs because they were once startups, Grimes said.
“They had a small business. They understand me. This is me, ”he says.
Ahmanda Grimes, owner of Spartan Financial, a financial services broker, poses in front of a portrait on Monday, May 24, 2021 in Nashville, Tennessee. When Grimes applied for a loan through his two traditional banks during COVID-19, the process looked more complicated than applying for a mortgage. When he reached out to an online lender, his application was quickly accepted and sent to the SBA. As a result, Grimes is considering a full transition to online banking, not just for loans. (AP Photo / Mark Humphrey) #