Is a Traditional Bank Really the Best Place to Get Your Loan?
Until just a few years ago, when small business owners needed to get a loan, their only choice was to go to a traditional bank. Banks have been the source for many billions of dollars of small business lending over the modern era of the U.S. economy, but in the aftermath of the financial crisis of 2008 and the Great Recession that followed it, many traditional banks have become less hospitable to small business lending.
As a result, many small business owners who need short-term business loans are starting to re-evaluate the conventional wisdom that banks are always best – and are trying new options to get small business financing. In addition, the rise of the Fintech industry has seen a proliferation of new innovations in financial services, making it easier and more convenient for consumers and business owners to access financial products online. As the financial services industry continues to evolve in new directions, the traditional model of the bank loan might no longer make sense for many people.
Here are a few reasons why the traditional banking business is under pressure due to the new opportunities of the Fintech era.
Banks are Reluctant to Issue Small Business Loans
In the years since the Great Recession, there has been a significant gap emerging in small business lending between the types of loans that many business owners want and the types of loans that banks are interested in issuing.
According to data cited by the Wall Street Journal, many large banks’ small business lending has not yet returned to the levels it was at before the financial crisis. A Harvard Business School working paper found that banks have typically been reducing their small business lending for amounts less than $250,000 or $100,000 – it costs the banks just as much money to make a small loan as it does to issue a larger loan, so banks are naturally gravitating toward the larger loans.
However, most small business owners prefer to borrow smaller amounts of $100,000 or less – but if they cannot get these loan amounts from a bank, they need to find other options. As a result, there has been significant growth in online loans as various platform lenders and crowdsourcing sites try to help small businesses get the working capital that they need.
Banks are Less Convenient
In the “old days” before the Internet, the only way to deposit a check or get a loan was to go to a local brick-and-mortar bank branch and talk to bank employees. But this is no longer true. Today we have lots of wonderful online technology that makes it easier and faster than ever to conduct routine banking business or even to apply for a loan. For example, according to the Financial Times, bank branches are conducting significantly fewer bank transactions – volume of transactions at brick-and-mortar bank branches has dropped by one third in the past six years.
That’s largely because consumers are using their smartphones instead: if you can use your phone to deposit a check or transfer money, why go to a bank? Also, there is rising demand among consumers for mobile banking services. Adobe’s 2015 Mobile Consumer report found that 20 percent of Millennials want to apply for banking products online, and most mobile consumers in the U.S. and U.K. would prefer a mobile-only bank option.
Compared to the efficiency and ease of mobile apps and online banking, the traditional bank branch experience feels stodgy and slow. These changing consumer preferences are also opening up new opportunities for online loans – if people are comfortable depositing checks from their phone, it stands to reason that they would feel confident about applying for loans via mobile devices as well.
Online Loans are More Flexible
The traditional bank loan process takes time and effort – filling out paperwork, waiting for approval, worrying about your credit score. Many small business owners have less than perfect credit, and so they are open to finding ways to get loans that don’t rely so heavily upon the traditional credit score. This is another way that online loans can be helpful – online lenders typically use a broader array of data to decide whether a business owner is creditworthy. Instead of looking just at the credit score, they might look at factors such as social media activity, shipping information, and online sales receipts.
There are many ways for a new business to prove that it’s a viable company with a good track record of sales, even if the company has not been around for more than a few years or if the business owner has imperfect credit. This spirit of flexibility and innovation is part of the business model of platform lenders who issue online loans – instead of being limited by the traditional banking model, these companies are using data-driven methods to identify worthy borrowers and make it possible for a wider array of businesses to get the working capital that they need.
Platform lenders and non-bank alternatives are not going to replace the entire financial services industry anytime soon – there is still a place for good, effective banking services as part of the overall financial system. But if you are having trouble getting a loan for your business from the traditional bank system, don’t give up – there might be better options that suit your needs.
