Small Businesses Preferring Online Lenders to Banks

Small Businesses Preferring Online Lenders to Banks

By Dylan Freni

In an ongoing trend, more and more small businesses are turning to online lenders when they need cash, not banks. In the case of industry leader OnDeck, it is much easier for lenders who are not affiliated with banks to attract clients due to the speed in which they can work and offer money to applicants. Although interest rates for these services are high, they are becoming the preferred method of small businesses who need a loan.

Why Banks are Out

In a recent segment by PBS, the case of a New Jersey deli was examined to understand why a business looking for a loan of a few thousand dollars wouldn’t consider going to a bank. The first reason, it turns out, is time. The owner of the aforementioned deli, Ron Wendolowski, says it is “aggravating” to wait months after applying for a loan with a bank to be approved for a small amount like $6,000.

For businesses like Wendolowski’s deli (which in this case, desperately needed to upgrade kitchen equipment), time is everything. Waiting months for a bank’s approval on a small loan can be frustrating, especially when you need to improve your business as soon as possible. The second reason, it turns out, is approval rate. Banks are notoriously picky when it comes to approving businesses for loans, regardless of how small the amount may be. Many merchants often need spectacular credit scores to qualify for a bank loan, which isn’t always reasonable. This has caused many businesses to look for help elsewhere.

Why Online Lenders are In

Online lenders, like OnDeck, provide fast loans for qualifying businesses. Their application processes are almost entirely online, and take just minutes to complete. The owner of the New Jersey deli above got his loan in just three days, which is incredibly fast compared to the slow bank approval process. However, you may be wondering about some sort of catch. Interest rates for these types of private online lender loans are usually through the roof. For a company like OnDeck, interest rates average around 50%.

However, given the fast turnarounds and no-strings-attached business model, many businesses are glad to make that sacrifice in order to get their loans when they want. It will be interesting to see how this trend continues to play out. For banks, it means a necessity to transform their business model when it comes to small business loans, as that sector of their business has fallen by 18% since the 2008 financial crisis. Meanwhile, online lenders like OnDeck will continue to profit from the needs of merchants who need quick financial assistance.

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