The New Startups Looking To Challenge The Banks At Financing SMBs

We have all read about how obtaining financing for small and medium sized business has become increasingly hard as banks make less and less loans. Luckily, some interesting startups are looking to exploit the gaps by offering traditional banking products to SMBs online and at the same time taking advantage of the new opportunities the internet offers.

Peer-to-peer lending
In a traditional savings model, an individual would put their savings in a bank and the bank would then invest their deposits in businesses and give the depositor a return for doing so. Peer-to-peer lending seeks to upturn this model by allowing individuals to directly lend to businesses (or people) via a website where borrowers can ask for credit and lenders can decide who to lend to. Replacing the banks with an online platform allows for lower borrowing costs for borrowers.

Whilst this can be great for business borrowers who have unusual business models which banks are wary of or who find banks charge a penal interest rate to, it can have disadvantages for the lenders. If you deposit in a bank then you can withdraw your funds very quickly and you do not take any credit risk (that the borrower may not repay). Peer-to-peer lending has all the risk one would expect when you lend money to a company for a significant period (e.g. they might not repay and you have to wait for the scheduled repayment dates). Lending Club is an example of one of these sites, its offers finance to both SMBs and individuals.

Asset based finance
For SMBs finance, finance companies have always looked to take as much collateral as possible. With asset based lending, banks give advances to firms secured on payments they are due (invoice finance and factoring) or secured on equipment, vehicles or property.

The Receivables Exchange is looking to disrupt the invoice finance end of the market by acting as a market place whereby companies can ask for invoice finance and investors can choose companies to supply the finance to. The Receivables Exchange takes a fee for maintaining the marketplace and sorting out the logistics of the transaction.

Standard lending but taking advantages of the net
The traditional bank models relies on a mixture of underwriters and expert judgement based computer systems  to assess the risk of a borrower. Some innovative non-bank finance companies are looking to try and improve this process resulting in better and quicker identification of which businesses are credit worthy.

Most of these businesses rely on taking advantage of the wealth of data that exists and can be quickly mined for valuable insights. On Deck Capital is an example of one of these companies that uses systems to quickly analyse financial data, credit rating agency data, and even social media to produce a quick response to lending requests. Other firms are exploiting niches that have opened up due to how the internet is changing business. For instance, several firms now offer finance to ebay and amazon merchants and base their lending decisions, in part, on information on merchants online accounts where they can see volumes of products sold and feedback scores.

Summary
If you run a small or medium sized business and are having trouble accessing finance, try and explore some of the many new financing companies operating online. Do your research and find the right niche and you could end up with better access to credit and at more favourable terms than at any bank.