The Small Business Lending Ecosystem: What to Know

In recent years, there has been an explosion of small business lenders (SBL). And this is a good thing, for sure! But buyers should beware. For some businesses, loans provided by alternative lenders is a godsend. But for other businesses, it could be a one-way ticket to bankruptcy. Over the next few days, we at ProStrategix want to explain all the different concerns and successes that the small business lending ecosystem can provide. From businesses in need of economic help to those that want to look outside of the traditional banking system, small business lending is something worth considering for your own business.

What is the Small Business Lending Ecosystem?

First and foremost, we wanted to provide a quick snapshot & overview of the SBL ecosystem. This graphic from Business Insider is a wonderful explanation of the many kinds of lending.

The graphic provides a way to look at the different types of lenders by class. Let’s go through a quick rundown of what each of these categories are in this small business lender ecosystem.

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Balance Sheet Lenders

Small business owners probably hear enough about balance sheets, but let’s translate this bank-speak into plain English. Essentially, these lenders mean the bank won’t sell your loan. Many lenders sell loans to others at a discount to reduce risk. As a consequence, balance sheet lenders are more cautious and will go through more scrutiny since they are the ones carrying the risk. The SBA was created in part to help mitigate some of this risk, and many of these lenders will steer you to these products.

Marketplace Lenders

These lenders, also called peer-to-peer lenders, post your application to their network of investors. Interested parties will be aggregated into a final loan offer. Since the risk is distributed, these lenders tend to be a bit more forgiving with respect to credit score and time in business. However, you will pay for that generosity through generally higher interest rates.

Lending Platforms

These are platforms where an algorithm reviews metrics from the application to match borrowers to particular lenders. This provides an opportunity to comparison shop across a broad range of lenders and loan products. This can be helpful for people who don’t have time or the expertise to comparison shop on their own. While these are helpful, they are limited to the number and types of lenders in their network. They are typically alternative lenders, which mean higher rates than a traditional bank. There will be a service fee attached to the loan as well.

Payment Companies

Payment companies are also getting into the act. Paypal and Square are also offering loan products. They are relatively new, but also offer small businesses an alternative route to traditional lending in this ecosystem.

In Conclusion

Our next series of blog posts will speak about how we used this ecosystem to help a number of our clients in different stages of growth. There is not a one-size-fits-all approach to the SBL ecosystem, so each business should carefully consider their options before making any decisions.