Online loans are financing sources who conduct the majority (or all) of their business via a website. Vendors include Lendio, PayPal, Kabbage, BlueVine, Fundbox, Ondeck, and StreetShares, among many. These companies have blossomed over the past ten years and for good reasons: small-business loans made up nearly half of all bank loans in 1995; they dropped to about a third by 2012.
The market's response? in 2016, according to the Small Business Credit Survey conducted by several Federal Reserve Banks, 19% of small businesses surveyed sought loans, lines of credit, or cash advances from an online lender. By 2018, that percentage reached 32%.
As once recent report noted, "The global digital lending platform market size was valued at USD 5.84 billion in 2021 and is expected to register a compound annual growth rate (CAGR) of 25.9% from 2022 to 2030. The benefits offered by the digital lending platforms, such as enhanced loan optimized loan process, quicker decision making, compliance with regulations and rules, and improved business efficiency, are expected to drive market growth."
Online lenders allow small business owners to apply for credit without visiting a bank. They use statistical analysis and "big data" to supposedly evaluate the creditworthiness of an individual or firm. While this might appear to be one way around the biases and discrimination baked into the traditional bank lending process (see our page on bank lending), it is no panacea. The same biases that exists in the real world undoubtedly find their way into the online world. Still, we rate this option as a good one for women and minority firms.
Online business lending may be "a convenient, accessible, and secure option for business owners in 2019—and more and more online business loan options are cropping up to address rising demand."
Request a Call!Given their use of AI and algorithms, online lenders have the ability to analyze traditional credit data, like personal credit scores and business cash flow, as well as nontraditional credit metrics (social media, online customer reviews) in an effort to "offer quicker and easier access to capital than traditional lenders like banks and credit unions."
For women and minority firms, this may allow a less discriminatory borrowing experience, but don't count on it.
As we noted, online lenders are expanding. They are being funded by venture capital firms and traditional banks. This means they are reaching for market share. In this environment, one might expect eligibility to go down. One would be wrong. While there are stories of people who got loans online fraudulently, lenders in this space are extraordinarily sensitive to any bad press, so they are evaluating borrowers very carefully.
To make the best use of this resource, we suggest you research specific online lenders to find out exactly what they look for when it comes to eligibility.
Online lenders are going to look for $50,000 to $150,000 in annual revenue.
Many online lenders "look for a total income that’s at least 1.25 times greater than your total expenses."
You may be able to use inventory, business equipment and real estate to secure the loan. With an unsecured loan, your credit score is the main factor used to determine if you get the loan. (Again, see the credit card section and our discussion of credit scores).
The following documents may be required:
Many online lenders, like credit unions, have low or no fees.
Other Fees include Late Payment Fees, Closing Fees, taxes.
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Larger online lenders have not shown any particular interest or skill in serving women or minority firms. There are a few specialized online lenders with promise. After the George Floyd incident, we have seen rapid growth in lendors targeting the minority community, and specifically the Black community. This nlinks to the growth of what is known as fintech. In addition, we have provided more information on this sector in our book, "Thriving As a Minority-Owned Business Building a Pathway to Success for Minority Entrepreneurs." See: https://www.prlog.org/12901067-thriving-as-minority-owned-business-building-pathway-to-success-for-minority-entrepreneurs.html
Online lenders targeting women and minority firms are geographically focused, like most community development lending. We suggest you conduct a comprehensive review of online lenders in your marketplace to determine if there are any with a women and minority business focus. If you need help, contact us.
Online lending represents a clear option for women and minority firms. The anonymity of online shopping should lead to a reduction in biased loan lending, but, there will still be issues. One 2018 study of mortgage lending found that "online and human lenders earn 11 to 17 percent higher profits off minority borrowers by charging African Americans and Latinos steeper rates, the study said. Black and Latino consumers pay 5.6 to 8.6 basis points higher interest on home purchase loans than their white or Asian counterparts with similar credit profiles — no matter whether they obtained their loans through a face-to-face process or online. The effect is smaller when it comes to refinancing, with black and Latino borrowers paying 3 basis points more." Just keep this in mind.
It varies. At the federal level, there are six relevant financial institution regulators:
At the state level, each state has an agency or agencies that are charged with supervising and regulating online lenders. For example, "under the New York Banking Law (“BL”), consumer lending institutions may be either banking organizations that are depository institutions, such as regulated banks and credit unions, or non-depositories, such as licensed lenders and sales finance companies." In 2018, the State of NY issued a report on online lending calling for more oversight. The California Department of Financial Institutions regulates online lending activity in it's state. A listing of state bank supervisors for all states is available at the website for the Conference of State Bank Supervisors. (https://www.csbs.org/state-bank-directory)
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