Finally, Smarter Small Business Lending
Access to money continues to be one of the greatest challenges facing the estimated 23 million small businesses in the U.S. While economic conditions have improved since the most recent recession and large corporate lending has rebounded, small business owners are still forced to reckon with increasingly tight standards from traditional lenders. In 2014, while large business lending grew 36 percent year-over-year, small business bank loans dropped 14 percent and "micro business" loans plummeted 33 percent. However, healthy small businesses have reason for excitement: technology is finally driving smarter lending at scale, enabling many smaller companies to access new pools of capital that willhelp grow their businesses.
The drought in bank lending to small businesses has created a flood of opportunity for non-bank firms to enter the market. Those leading the charge include my own company PayPal, OnDeck, Kabbage, Capital Access Network, IndieGoGo and Lending Club, providing products such as working capital, merchant cash advances, peer-to-peer loans, and crowd-funding. These non-bank lenders and others like them offer easier, faster, and fairer access to loans, leveraging broader data sets and new credit models to evaluate credit-worthiness. For example, one start-up determines a business owner's borrowing capacity based partially on social media activity, while another firm uses shipping history and customer reviews.
Last year, PayPal introduced PayPal Working Capital (a loan issued by WebBank), in which sales history drives loan underwriting and an expedited application. Select small businesses quickly tookadvantage of the launch to grow their businesses, as several PayPal business customers collectively borrowed more than $130 million to finance new inventory, build infrastructure, enact marketing campaigns, and more. For example, Steve Contratto, owner of CF Sales--a seller of Logitech computer accessories--leveraged his recent loan proceeds to purchase inventory that he turned into $40,000 in sales, growing his business by 40 percent in one month.
If You Offer Consumer Credit, They Will Come (and Purchase)
The value of improved access to small business working capital shouldn't overshadow the importance of qualified consumer access to credit as a lever to drive business growth as well. Small businesses in America make up over half of all U.S. sales, but such businesses typically don't offer the same level of purchase financing as delivered by large retailers. But just as the landscape is improving for business access to capital, several technology-enabled consumer credit options are gaining traction.
There are several unique benefits provided by consumer lenders that harness technology. In the online commerce environment, in-context credit for customers can make the difference between a successful sale and an abandoned cart. With an average online shopping cart abandonment of 68 percent, there is tremendous value at stake for businesses to improve conversion.
Both online and in store, tech-enabled consumer credit options can also offer improved transaction security above and beyond that offered by credit card providers, minimizing business liability for fraud. Merchants who accept digital wallets for payment, asking only for usernames and passwords instead of credit card information, can dramatically decrease their exposure to transaction fraud. Acceptance of digital wallets also enables the wallet providers to lend directly to consumers, delivering increased conversion for merchants without those merchants taking on any lending risk.
The traditional conversion benefits of consumer finance hold true as well, as small businesses can benefit from more frequent and larger transactions. Matt Pappas, owner of Florida-based Superior Fireworks, watched his sales explode this 4th of July with the help of credit advertised on his website. Customers receive flexible payment options and the business benefits by immediately getting paid in full, without having to deal with riskier data transfers as with credit cards. This proved key to growth for Pappas, whose customers were able to defer the cost of large, seasonal orders over several months. Pappas' story illustrates how technology-driven consumer finance can help businesses improve conversion without taking on additional risk.
A New Credit World
Improved access to credit is a powerful tool to help business owners sell more and to help consumers responsibly buy more both online and in stores. Given the importance of small business growth to the health of our larger economy and the recent failure to meet small business credit needs, the new world of credit options for small businesses comes not a moment too soon.
Dan is the Vice President and General Manager of PayPal’s North American Online Small & Medium Business unit. Before joining PayPal, Dan was with McKinsey & Company in San Francisco, where he was a leader of the Digital Payments Practice.