When it comes to commercial lending, Lending Club has plenty of company. Some of its competitors are also intermediaries that finance loans through wealthy investors and hedge funds; othersmake loans directly on their own balance sheets. The biggest of them--and most have been fully operational for less than two years--claim they will make at least $100 million in small-business loans this year. But there are dozens more, and it seems like each month brings word of a new website gone live. Here’s what else small businesses should watch for in the next five years.
The most novel new lender is Kickfurther, run by 28-year-old Sean De Clercq. Kickfurther uses crowdfunding to purchase inventory on behalf of small distributors and retailers, and raw materials for manufacturers. Businesses choose the rates and length of the financing; how quickly an order gets financed sends a clear signal about whether the offer was appropriately generous. The site has attracted a crowd of some 1,000 users since it arranged its first transaction in November, right out of an accelerator. In January, Nathan Morin of North Coast Organics, which makes certified organic and vegan body products, posted a finance request: $1,500 to fulfill a purchase order, paid back over two months with a 10 percent return. “I woke up the next morning and it was 98 percent funded,” he says. “I was amazed.”
Help From the Little Crowd
What of equity crowdfunding, the simplified way for small companies to sell shares to ordinary investors? The Securities and Exchange Commission is more than two years late in finishing crowdfunding rules, Congress is threatening to intervene, and many businesses have given up, according to Richard Swart, a researcher at the University of California, Berkeley, and an early crowdfunding advocate. Even state-chartered platforms, which are beyond the SEC’s reach, “are basically all dead,” he says. Instead, businesses have gravitated toward platforms for wealthier, more sophisticated investors, made legal by a different part of the 2012 JOBS Act. Businesses raised $490 million that way in 2014, according to Swart, who predicts such fundraisingwill increase to about $1.7 billion by 2020.
The SBA Aims Smaller
Small Business Administration guarantees on small loans actually fell during the recession, as banks moved to make bigger, more profitable loans. OnDeck and other online lenders picked up the slack, and that has SBA officials worried, says Bob Coleman, who both tracks and advises the SBA lending industry. “When they see the 50 and 75 percent APR, they understand how destructive that is to Main Street small business.” Now the SBA is trying to reclaim the small-loan market with pilot programs to get more banks making small loans. Despite attacks on the programs from bank regulators and Congress, the agency’s track record on small loans is improving: “The future of the SBA is loans under $150,000,” says Coleman.
The Future of Regulations
Consumers have long been afforded some protection from predatory lenders by federal law, and the new Consumer Financial Protection Bureau has in its four years imposed new limits on a variety of lenders. But even though the agency is now taking on payday loans, which share some traits with merchant-cash-advance loans, don’t expect regulators to scrutinize the latter anytime soon. Business owners, rightly or wrongly, have always been presumed more sophisticated than consumers, and business loans are exempted from some consumer protections. And with so many more consumer-lending issues still up for scrutiny, including student loans, it will no doubt be a while before regulators sail into these uncharted waters, if ever.