Small Business Financing Trends To Stay Abreast Of

by CXOtoday News Desk    Jan 12, 2018


The world of business financing is evolving; every year, new and novel financing methods emerge on the lending landscape and attract small business owners and startup entrepreneurs in particular. Some of these novel methods work well, and some don’t. What‘s certain is that the times when small business owners had to wait in queues in banks for the verdict on their loan applications are over for good. The innovation, thankfully, doesn’t stop. As a small business or startup owner, you’d need to be aware of the latest from the world of lending so that you don’t miss out on inexpensive and convenient financing when you need it the most. In this guide, we will cover some of the latest trends from the world of small business financing. Before that, let’s answer an important question.

Why Do SMB Owners Need to Be Aware of Financing Trends?

Here are some of the reasons:

·         Traditional bank loan rejections are notoriously high in all markets

·         Small Business Administration (and equivalent agencies) are nefarious for overextending the time-to-credit tolerances of small businesses

·         Volatility of markets, and exposure of almost all markets to disruption by startups could pose urgent cash needs for businesses, which are generally not considered for loan applications by traditional lenders.

Crowdfunding And Its Appeal as A Financing Platform for Small Businesses

All throughout 2016, crowd funding platforms saw a lot of trust from startups that leveraged these platforms not only to seek funds for their business, but also to seek validation for their products from the end consumers. Because of the success the crowdfunding model has showcased already, more and more platforms are coming up, offering financing options to all kinds of small businesses and startups. What started as a medium of financing mostly focused on seeking donations from individuals to raise the necessary money for small business to manufacture mass market products has now grown into a full-fledged model of financing for all kinds of businesses.

Increasingly, crowdfunding platforms are venturing into newer spaces. For instance, real estate crowdfunding platforms are proving to be game changers for agents and brokers, who can enter the otherwise cutthroat and intensely competitive market using these platforms. Also, niche crowd funding platforms are likely to crop up, to offer differentiated services to specific markets, and entrepreneurs with special and unique financing needs. Equity and debt crowdfunding, though not exactly a new phenomenon, are also going to strengthen their hold over the market in the years to come, as more and more small business owners ditch conventional financing models to look for alternatives.

Online Lending And Its Deepening Hold Over The Small Business Finance Market

In 2008, when the world witnessed financial turmoil across industries, banks became very conservative about issuing loans, especially to small businesses. It was around the same time that online lending platforms started popping up, offering financing solutions to small businesses, without requiring them to go to a bank to fill in cumbersome applications for loans. In the past 3 years (2014 onwards), the online lending market has expanded manifolds.

In 2014, a Federal Reserve (US) survey concluded that one in five small business owners opted for loans from online lenders. Since then, the proliferation of online lending platforms has been on the surge, to the extent that traditional brick and mortar lending institutions have also had to move base to the online domain. In the coming years, multiple factors will result in the success and sustainability of online lending platforms. These include:

·         Growing confidence among small business owners to trust online lending platforms

·         Availability of cheaper, quicker, and more convenient loans

·         Options to truly personalize and customize the loan repayment terms to suit the business’ interests

The Call for Transparency in the Online Lending Market

Though the online lending market has been growing year on year, this doesn’t detract from the concerns around lack of transparency in the way some of these platforms operate. Some of the key concerns are around undisclosed APRs and hidden fees. In fact, some online lenders have been castigated for charging significantly high rates of interests from borrowers, often with service quality issues post-approval. Thankfully, there’s already some progress towards bringing a degree of regulation in place for online lending platforms to be at par with traditional lending regulations.

Market leaders from the online lending market, such as Lending Club, Opportunity Fund, and Funding Circle, for instance, recently introduced a Small Business Borrowers’ Bill of Rights, which is meant to be a framework for how online lenders should treat small business borrowers. Among the many tenets of the framework is one that highlights the borrower’s right to transparent pricing and loan terms. Increasing focus on regulation of online lending will not only drive a push towards better service quality, but will also help ethical players differentiate themselves from the rest.

Rollover as Business Startup (ROBS)

Baby boomers are nearing their retirement age, and beyond 2017, there will be significant numbers of retirements among people of this generation. These people are likely to retire with significant retirement amounts, and will also have their retirement savings to invest. For them, investing in small businesses is likely to be a pretty hassle free and useful option. Apart from the fact that they will be able to quickly able to find borrowers, these people will also enjoy tax benefits from governments. This strategy is called Rollover as Business Startup (ROBS). Because of the win-win proposition that such a financing option becomes for both the lender and the borrower, it’s only a matter of time before it cements its place in the priority lists of small business owners looking for convenient, inexpensive, and quick loans.

The Increasing Importance of Online Presence

You might be surprised to know this – apart from your credit score, new-age lenders look for a lot more information about you, and, apart from checking commodities news, they’re willing to look towards unconventional yet reliable sources for some insight. For instance, several online lenders conduct social media research about individuals and startup entrepreneurs before sanctioning loans. It’s common enough for these platforms to use social media monitoring and listening tools to gauge your business’ reputation. For instance, the kind of reviews and ratings your business has on online platforms helps lenders evaluate whether the future prospects of your business are healthy enough to warrant a flexible and inexpensive loan.

Underwriters also look for customer reviews of service businesses in the hospitality and food and dining markets on platforms such as TripAdvisor and Zomato to understand and assess small businesses. So, as a small business owner, make sure that a basic social and Google search on your business yields results that give confidence to lenders by conveying a message of good-health of your business.

Concluding Remarks

The information age, among everything else, has also positively impacted the world of small business financing, helping small business owners seek funds to aid working capital financing, and business expansion. The trends covered in this guide will shape the progress of SMB financing in the years to come. Knowledge of these trends will help your small business secure inexpensive and convenient financing when the need arises.