What a difference a decade makes. When alternative lenders like Prosper and Lending Club were gaining traction with small businesses desperate for cash in the aftermath of the 2008 recession, traditional banks and financial institutions viewed them as outliers. Today, companies from both sides of the lending spectrum have learned from each other and found ways to occupy the same space and sometimes work collaboratively. And New Jersey’s small businesses and entrepreneurs, driving forces in the state’s economic success and growth, have been the beneficiaries.
From innovative loan options with varying lengths and terms and ways to finance them, to streamlined approvals driven by data analytics, digital and online service enhancements, alternative lenders took full advantage of technological advances to meet the needs of small businesses. And, with surging numbers of startups and entrepreneurial ventures searching for funds to fuel expansion, equipment purchases and more, it was a match that has fundamentally changed the small business lending landscape.
From large financial institutions to community banks, through internal development or partnerships with alternative lenders and subsidiaries, technology is no longer a competitive disadvantage. That has helped traditional banks close the gap on the faster decisions and higher rates of approval that had come to define alternative lending’s appeal, despite rates and fees that were often higher by comparison. Bank representatives also point to the advantages full-service financial institutions have always provided and continue to offer their customers.
Ed Ross, Wells Fargo’s northeast small business acquisition manager, says one benefit is the breadth of experience and offerings that can be provided to business customers. “Small businesses are continually seeking faster, more convenient lending options online at competitive interest rates, which is often where the comparison of traditional banks and alternative lenders stems from,” Ross notes. “One example of how a traditional lender is meeting this need is our FastFlex® small business loans where we can offer competitive rates and a fast decision.
“But beyond just speed and interest rates, traditional lenders have the ability to look at the whole customer experience picture, from having specialized bankers for different industries with different needs to technology and resources that help with critical elements of running a business – like cash flow,” Ross continues. “This ability to move beyond one element and improve the entire customer experience can be a key differentiator.”
Clearly, advances in technology have enabled alternative lenders to impact the small business lending sector, Eileen Sackman, senior vice president of commercial lending at Valley Bank, states. However, Valley offers certain loan products that compete with alternative lenders in terms of turnaround time. “Highland Capital Corp., a subsidiary of Valley, offers equipment loans and leases which, depending on the dollar amount, may be application based and can be turned around between 20 minutes and 24 hours,” Sackman points out. “Valley also offers a business credit card which can be decisioned within 24 hours from receipt of a completed application.”
At the same time, Sackman adds, Valley is a full service, long established, relationship-oriented bank. “We can provide for all of the business and personal needs of our customers. Aside from business loans, we offer the full range of financial services including depository services, cash management, treasury services, wealth management and residential mortgages, just to name a few,” Sackman suggests. “And, we have the ability to tailor lending products to the needs of our customers.”
David Fasanella, executive vice president and chief lending officer at Northfield Bank, agrees that alternative lenders at one time had a technological advantage, but banks have responded, including Northfield’s ability to provide decisions on many small business loans in 24 hours. He adds that while banks have the ability to review data and analytics, as alternative lenders pioneered, they go beyond computer models to confirm credit worthiness.
“Credit scoring has been around for a long time and online lenders saw the value when it came to smaller loans,” Fasanella notes. The growing number of millennials and other young business people pursuing entrepreneurial endeavors and startup opportunities also welcomed a more digital loan experience tailored to their needs and expectations.
To expedite their competitiveness on this new playing field, some financial institutions decided to buy non-traditional lending companies instead of building that capacity internally. Others have chosen to partner with alternative lenders by giving them access to loans the bank has rejected for a second look, given their tolerance for higher risk. In return, if the loan is approved, the alternative lender pays a fee to the referring bank.
“Younger demographics are more comfortable with technology and apply for everything online,” Fasanella adds. “Many have never stepped into a bank branch office. However, having a face, a branch manager, a business lender, a personal banker to build a relationship with and experience a higher level of service may be more valuable than fast approvals, particularly at higher rates from online lenders.”
Bank representatives also remind potential small business borrowers of the value and importance of Small Business Administration (SBA) loans. In certain cases, they fill a gap between traditional and alternative lenders.
Wells Fargo’s Ross says SBA lending is an important way to provide business owners with the financing they need to build their businesses – particularly smaller, newer businesses. “Through SBA lending, we are able to offer financing to a segment of creditworthy small business owners who may not be able to obtain a conventional loan or loan terms that meet their business needs,” Ross notes. “Because of this, we are proud of our longstanding history in SBA lending. As a national SBA Preferred Lender, we have extended more than $1.2 billion in SBA loans in the federal fiscal year 2018 to businesses of all types and sizes, including smaller and newer businesses.”
“The SBA Program is a niche finance program so the rates may not be the same as conventional loans, but they are more attractive than most alternate lenders,” Valley’s Sackman adds. “SBA terms are generally longer than alternative lenders, which helps cash flow. SBA customers are true Valley customers. They bank with us and have access to all the products and services Valley offers.”
Other business organizations have also recognized the value and importance of a full suite of lending options for the overall growth of small businesses and entrepreneurs, particularly among communities of color. That includes both traditional and alternative lenders.
In February, the Statewide Hispanic Chamber of Commerce of New Jersey (SHCCNJ) announced a partnership with World Business Lenders, a national alternative business lender, on an innovative plan to foster greater Latino entrepreneurship throughout New Jersey.
Under the program, the SHCCNJ will establish and administer a loan program for the sole purpose of making low-cost capital available to its members in order to support their business growth and expansion needs. World Business Lenders, serving as advisor, co-sponsor and servicer, will lend start-up financing to the loan program, while working with the SHCCNJ to secure commitments from other sponsors, and will provide on-the-job training for loan program representatives. World Business Lenders will contribute, at cost, its existing infrastructure to support the implementation and execution of the program.
“120,000 Latino-owned businesses right here in New Jersey contribute $20 billion annually to our state’s economy, but these business owners identify access to capital as their top hurdle and impediment to further growth,” SHCCNJ Chairman Carlos Medina said at the time of the announcement. “Latino entrepreneurs often believe that financing at acceptable terms is unavailable to them. This innovative program is a meaningful step in providing Latino entrepreneurs with the capital they need to grow or expand their businesses.”
Wells Fargo’s Ross believes that increasing demand, in the aftermath of the Great Recession, across the small business sector, has also contributed to the growth of alternative lenders and more lending options in general.
“After several years of gradual economic improvements, the typical small business owner we meet in 2019 has a stronger business balance sheet and cash flow than 5 to 10 years ago. It’s a great sign. It often means the small business is in a better position to get approved for credit,” Ross highlights.
“Healthier small businesses with opportunities to grow typically leads to more lending demand and strong approval rates. We’re continuing to see more of these businesses today. The market for small business loans is competitive today, and that’s good for small businesses,” Ross concludes. “They have clear choices when it comes to choosing a financial services provider and finding the right financial products and services for their businesses.”
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