Big banks continue to be the strong lenders for small business owners, according to my company’s most recent Biz2Credit Small Business Lending Index, which analyzes approval rates for small-business loans. The largest banks ($10 billion+ in assets) are approving 22.1 percent of funding requests, which represents the highest post-Great Recession figure. Contrast that with June of 2011, just four years ago, when more than 90 percent of small business loan applications were rejected by big banks.
However, banks now face a substantial challenge from institutional lenders--including credit funds, insurance companies and nonbank financial institutions--that make funding available to small businesses through marketplace lending platforms. This is an evolution is a natural progression of peer-to-peer lending (P2P), which gained favor during the credit crunch. When traditional lenders stalled, entrepreneurs looked elsewhere for capital.
Institutional investors, looking for returns, saw P2P lending as an opportunity, and technological advances, namely the establishment of online marketplace lending platforms, made it possible. Volume-wise, banks still are doing the most number of deals, but non-bank lenders have gained a solid foothold.
We have seen this type of revolution in other industries. At one time, Budweiser had an overwhelming market share of the country’s beer sales. The craft beer revolution, led by companies such as Jim Koch’s Boston Beer Company, the brewer of Samuel Adams brand, eroded Bud’s stranglehold. In fact, in 2013, craft beer overtook Budweiser sales for the first time.
Although Bud sells more beer than anyone else, other brands have carved out their niches in the marketplace.
Similarly, consumers’ tastes have changed in both the banking and beer industries. No longer does one size fit all. Among beer consumers, there are fans of domestic beers, light beers, imports, and craft brews. Each purchases according to their tastes. Meanwhile, in small business finance, borrowers can apply for traditional bank loans, government-backed SBA loans, which offer good interest rates, but take longer to process, cash advances, which provide a quick infusion of money but generally at high interest rates, and other financial products.
When there are more choices in the marketplace, the shopper wins — whether the product is beer or banking. Healthy competition usually means lower costs for consumers and improvement of the offerings made by companies, whether they are banks or brewers.