Online lending and its cost on business
As the online lending industry grows out of a worldwide economic slump, it is starting to get a little crowded. With 200 or so different providers that offer credit to smaller businesses, competition is becoming more fierce and prevalent. One of the bigger names in the market, OnDeck Capital, deals with a drop in shares following a less-than ideal financial forecast, and the industry is feeling the heat. However, this stress may be exactly what the lending industry needs to clean out the mess.
Many online lenders are now more akin to payday lenders, that have annual percentage rates reaching 50% or more. As there are many untrustworthy lenders out there, it can be troubling for small businesses to know where to go. Moreover, as the industry starts to get more crowded, there is a greater need for a clearing out of the industry of these unscrupulous business lenders. Ironically, Marketlend business is flourishing partially because of small business owners realising the costs of the online lender after the loan is taken out. They work with Marketlend to obtain a more competitive and risk diverse solution. This is because the interest rates are transparent, similar to the banks and obtaining the risk diversity of several investors instead of one. For example, we recently refinanced one client, where the lender obtains all the day’s takings right into their account and after receiving their payment, distributes the proceeds of his business back to him two to three days later. This caused delays in his cashflow and difficulty in knowing the rates they were charging. Marketlend has seen that some of the funders of these online lenders have been unable to fund Marketlend loans as they have a much higher interest rate threshold.
This shakedown may come sooner rather than later, as banks are opening their doors to small businesses once more, and the government speaks of introducing legislation similar to the national credit code for small business owners. As the alternative lending industry blossomed through the bank’s financial crisis, it is difficult to gauge how it will fare with a healthier finance infrastructure. A general consensus amongst experts show that as the alternative lenders have yet to deal with a ‘down cycle’, it is untested ground for them. As a result, many alternative lenders are scrambling to become more appealing.
Alternative lenders are hoping to examine things such as rent payment histories, or a borrower’s social footprint to indicate risk for a loan. However, these new credit scores are yet to be tested and may cause some serious problems for business owners should economic conditions take a turn for the worse. Another problem would arise as smaller lenders may extend credit without proper risk assessments. This could potentially cause an increase in the number of defaults on the books.
It is likely that the alternative lending industry will see substantial amalgamation over the next year, as smaller lenders cannot keep up with the changes required. The good news, though, is that this should remove many of the high-interest loans currently out there. Initially, this shrinking of the industry may cause problems for small business owners, however in the long run it will make for a fairer business environment.