Following the market crash of 2008, the government increased regulations and restrictions on lending practices on the banking industry. It was an attempt to compensate for their failures that contributed to the mortgage crisis and financial collapse. This ultimately, and necessarily so, made obtaining new sources of capital more difficult for both individuals and small businesses.
When Small Businesses Need Capital
Small businesses account for roughly half of all private sector workers. Their sustainability and growth is vital to maintaining a healthy and thriving economy. Having access to and obtaining additional capital is an important part of a business’s life cycle. This money is used to expand, add new products, increase inventory, invest in new equipment, or simply cover operating costs during slow cash flow times.
Once this void in small business loans emerged, the ingenuity of the marketplace kicked in and new financing alternatives came into being. Case in point, the rise of non-bank lenders. Traditional banks were slow and reluctant to lend smaller amounts (less than $250,000) due to the costs of underwriting and the regulatory burdens that make them less profitable. Alternative lending institutions came. Most of these utilize the ease, accessibility, and innovative properties of the internet to bring their products and services to market.
Read the Fine Print
These apparently consumer-friendly, streamlined interfaces claim to cut through the paperwork. In addition, they make short-term and small dollar loans relatively easy to obtain. They seem to offer consumers greater flexibility and options for borrowing capital. However, as with all new innovations, there’s going to be a learning curve. It will take time for this new face of lending to shake out. Small business owners have the most to lose if they aren’t extremely careful.
The difficulty currently facing the industry is how to take advantage of these new and innovative lending practices, while still protecting the individuals and small businesses so that we don’t end up in another predatory marketplace that ultimately leads to another financial crash.
Know your Rights
The government and industry watchdogs have developed the Small Business Borrower’s Bill of Rights. They have also begun collecting and reporting loan origination data, as well as actively spotlighting abusive practices. But consumers and small business owners still need to be vigilant. If an offer sounds too good to be true, it just may be.
As we recognize the emergence and growing popularity of these alternative lending practices, our goal at Ten Key, Inc. is to advise our clients on the risks and benefits involved in utilizing them. Our article on internet loans digs deeper into how to evaluate the internet loan options being offered by these non-bank lenders.
Reputable and innovative organizations are out there. And it’s good to have new ways of meeting the unique needs of small businesses. But not all non-bank lenders are doing right by their customers. With little current regulation, the onus is on the small business owner. Do the research and make a smart choice. If your business needs additional capital, talk with us first. We can help filter through the options and find the lending solution that best fits your needs.