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The Threat of Alternative Lenders Is Real

According to the Small Business Administration, the value of small-business loans outstanding in the United States is about US$600 billion. This large number, coupled with small businesses’ growing need for credit to start and run their businesses, makes this space an attractive one not only for financial institutions but also for the growing number of alternative lenders popping up and posing a threat to traditional ways of evaluating and originating credit.

Alternative lenders, such as OnDeck Capital—especially after the announcement in December 2015 of a partnership with JPMorgan Chase—are getting increased attention in the market and press. Recent Aite Group research suggests that attention may grow even further over the coming months as small-business owners as well as banks start to take them a lot more seriously. An October 2015 Aite Group survey of 1,000 businesses in the United States generating less than US$20 million in annual revenue found that while only about 2% of those businesses have used an alternative lender in the past, 26% state they probably or definitely will consider using one the next time they need credit. The largest businesses generating greater than US$5 million in annual revenue show the greatest likelihood to do so. Additionally, businesses run by Gen Yers/millennials and Gen Xers are more likely to consider using an alternative lender than are businesses run by baby boomers and individuals in other age groups.

This should be a real eye-opener for banks and a sneak peek at what’s to come if they don’t begin evolving outdated processes. Among those businesses most likely to use an alternative lender, some key reasons for doing so include faster decisions and access to funds, process ease, and more modern approaches. Small businesses are losing patience with manual, paper-driven processes and being told they are not creditworthy when a deeper understanding of their business would show they are.

Look for Aite Group’s upcoming report titled Appetite for Disruption: Why Small Businesses Embrace Alternative Lenders and What Banks Should Do About It for more information about this market and about how banks can better position themselves to fight back.