If you like the Harry Potter universe, think to the beginning of the spin-off film Fantastic Beasts and Where to Find Them. In 1920s New York City, An ambitious Muggle named Jacob Kowalski pitches his bakery business to a banker in hopes of getting a loan. He’s passionate and driven by a valid business plan, but he’s very quickly denied due to various reasons. Most of these reasons are due to the time period, but nevertheless, this fictional instance illustrates the frustrations that come with getting a bank loan. For most of modern history, getting a loan has required business owners to go through the strict vetting and application process from a bank. Often, this required going to a bank, sitting across from a banker and pleading that your business was worth funding. This took a significant amount of time, and the majority of applicants were denied. This is what led to the creation of the lending marketplace.
Banks have been the gatekeepers of loan financing until recently. The internet has managed to change the nature of getting a business loan, and you – the businesses – are the ones who benefit from the new idea of a “lending marketplace.” This disruption of traditional loan sources was created, in part, by public trends (trust in online transactions, demands for immediacy, and proliferation of public data, according to a report by Deolitte), and part from the 2008 financial crisis. Businesses trying to start, or restart, after the crisis kept getting denied for funding because the stakes were higher and businesses were in worse financial shape than before. The online lending marketplace was a response to the strictness of banks, as a way for businesses to get funded in an easier way.
A lending marketplace, as defined by the U.S. Treasury Department, is “the segment of the financial services industry that uses investment capital and data-driven online platforms to lend either directly or indirectly to consumers and small businesses.” Basically, this means that the “lending marketplace” is just the plethora of online lenders that provide loans to individuals and businesses via an online platform. You don’t have to go to a bank or search through piles of business documents. In the same way Uber disrupted the old-fashion taxi industry, online lenders disrupted the loan industry. Lending marketplaces popped up as a way to finance businesses that banks denied.
Originally called “peer-to-peer lending,” as the industry grew, so did its investor base. There are a lot of different lenders within the online lending marketplace, but they all have key similarities:
- You’re more likely to get approved than at a bank because they make their money solely from lending money.
- The process to get funded is much quicker because they use technology-enabled underwriting – meaning they automate the process of determining credit risk and identity.
In fact, according to the U.S. Treasury Department, businesses that apply to the online lending marketplace for funding get approved 70% of the time. They streamline the application process and cut the barriers to entry because they’re designed only for lending money. Because they’re online, they take less time and resources to figure out, making them an attractive option for businesses looking to get funded in less time.
The lending marketplace is packed full of loan options – hence the “marketplace” side of it. No matter what type of funding you’re looking for, chances are there’s a loan that fits your needs. Here are the most popular business-funding options from online lending marketplaces:
- Lines of credit
- SBA loans
- Short term loans
- Business term loans
- Merchant cash advances
- Business credit cards
- Equimentment loans
The Disruption Factor
As the online lending marketplace expands and further disrupts the loan business, so does the need for greater consumer knowledge surrounding their offerings. America’s competitive business nature often means that consumers can get bogged down with decisions with very little discretion as to which is the best one. This is what FaaSfunds does, we take out all the variables of getting funded and automatically show you what works best so you can be fully informed. Like the marketplace lenders, FaaSfunds uses data technology to analyze your finances, but instead of getting you a loan directly, we take that data and use it to figure out which loan fits best with your financial situation. The process is entirely transparent, and the goal is to keep you informed so you can make the best decisions.
There are also products that create loan-specific comparisons for your business finances, and break down the costs and payoffs of certain loans, like the SMART Box Capital Comparison Tool.
What’s the Catch?
You can receive student loans, consumer loans and an array of business loans online, with the interest rates being the main difference from banks. Since marketplace lenders take on higher credit risks, they charge higher interest rats. If your credit is bad, unfortunately, this means you’ll be considered a “high risk” client. Lenders take the chance of losing the money they’re owed, so they compensate for this with high rates. Banks also have access to “cheaper money” through their many other sources of revenue – banks don’t operate solely to lend money, but the marketplace lenders do. Also, the Federal Reserve (the bank for the banks) lends money to banks at very low rates. Online marketplace lenders receive their funds from alternate sources – venture capital firms, investors, and hedge funds – who don’t have the government’s blessing.
Is the Lending Marketplace Better?
The discretion of what’s better or worse for borrowers depends entirely on their financial situation. The basic tenets for what would make turning to the online lending marketplace appealing depends on your experience with getting loans in the past or your credit health. If you’ve had trouble getting approved for business loans from a bank in the past, then the lending marketplace offers a solution for that. Mistakes happen, as well, and sometimes less-than-ideal situations result in hits to your business credit. Marketplace lenders are there for businesses that don’t meet high bank standards – because sometimes high standards don’t necessarily determine worthiness.
The best advice is to really understand your business’s needs and finances – FaaSfunds can help with this – and be aware of the tradeoffs for each different type of loan. FaaSfunds will help you sort through all the options within the online lending marketplace, and help you figure out not only what you qualify for, but also what will fit best with your business needs.