Online business lending is here to stay--by now, that's just a fact.
With so many small business owners getting turned away from banks every day, there has to be some source of credit to keep the lifeblood of our economy pumping. Whether they're for emergencies and last minute paydays or for well-planned growth initiatives and thoughtful purchases, small business loans help business owners stay alive and succeed. And since the banks aren't handing them out to 80% of small business owners, alternative lenders stepped up to the plate.
But that's old history by now. The alternative lending industry has roughly doubled every year by a number of metrics, like venture capital funding, and clearly accesses some major pain points. And there's a lot of innovation still left to be done.
The question isn't whether alternative lending will be around, then--it's how things will change going forward. Here are the 3 major trends that we think will affect online small business lending in 2016.
1. More Bank Partnerships
Partnerships come in all shapes and sizes, but it's pretty likely that this trend continues into 2016 and beyond. Banks and alternative lenders could be competitors, fighting over the same customers, or they could combine skills and knowledge, widening the reach of both.
Take JP Morgan Chase's partnership with OnDeck. OnDeck performs JP Morgan's underwriting and processing for small business loans, in return for origination and service fees. OnDeck makes money from a previously inaccessible customer base just by contributing the technology it already has--without the risk of directly lending. JP Morgan Chase, on the other hand, can cater more towards small business borrowers with increased speed and automation.
Their partnership announcement led to a 28% increase in OnDeck's share price over a single day--it's a big deal. But it's not the only sort of cooperation that we've been seeing in the industry, either.
Regions Bank partnered up with Fundation to offer a completely co-branded borrowing process for small business owners, in contrast to JP Morgan's white labeling of OnDeck. Fundation gets the extra advantages of brand awareness by teaming up with the semi-local Southern- and Western-focused Regions Bank, while Regions gets faster and more efficient. Likewise, Lending Club is working with BancAlliance, a conglomerate of local banks, to help underwrite their individual loans as well.
There are plenty of other possible forms an alternative lender-bank partnership could take--and some will probably surprise us. But teaming up is definitely an influential trend to watch in 2016.
2. Rising Interest Rates
For the first time in 7 years, the Federal Reserve feels confident enough about the American economy that it's willing to raise interest rates. In order to encourage as much employment and healthy borrowing as possible, the Fed has recently kept interest rates low--near zero, in fact--but its recent hike upwards indicates that the central bank believes our economy is now in a stronger position.
Small businesses have been prospering across the country, and though higher interest rates will make borrowing more expensive, it ideally shouldn't have any negative repercussions. The idea is that their increased success more than compensates for the rate adjustment. But how will the alternative lenders who serve small business owners feel the impact?
It's likely that banks will slowly but steadily increase lending to small business owners, too, edging into the alternative lending territory a bit. How lenders will respond to this remains to be seen, but it's possible that balance sheet lenders will raise their prices as well to adjust for more expensive borrowing.
Peer-to-peer lenders, meanwhile, might also need to raise rates in order to stay competitive for their investors when compared to other possible investments. Higher rates could entice investors to stick around, since they would get bigger returns on their investments... Or they could get scared off, if they believed that more business owners might default on their loans. Experts don't all agree, but only a few are actually concerned about the industry.
3. Advancing Technology
Technological innovation is the bread and butter of alternative lending. Whether their underwriting moves faster, takes more factors into account, or assesses risk more efficiently, alternative lenders rely on their automated algorithms to keep costs low and differentiate themselves from the bigger, slower, more cautious banks. Plus, it's often just plain easier to upload documents and manage options with a forward-thinking, technology-focused platform.
It's hard to say where exactly this trend will take the industry, but it's a safe bet that technological development will continue to be one of the most important goals for everyone in the alternative lending industry. There are always more ways to help small business owners, after all.
What 2016 holds for online small business lending remains to be seen. But if more banks partner with alternative lenders and technology continues to advance, this bodes well for America's small businesses.