What is the future of small business funding?
According to an article by Marc Prosser, companies like FundBox, OnDeck, and Fundera have been able to generate a large amount of money in a short amount of time for primarily two reasons. “They are as much technology companies as they are finance companies,” he wrote. “They are serving a market, small businesses, which has been neglected by banks for decades.”
Loans for small businesses
The stumbling block for small businesses is that some big banks still don’t see a value in taking an apparent risk with an SMB. The same is true for the SMB approaching a bank. “Many small businesses don’t even apply for loans, because they anticipate rejection,” Prosser added. “Small banks are much more willing to lend to small businesses, as about half of loan applications to small banks result in a loan offer. However, small banks use SBA loan guarantee programs heavily to limit the risk of these loans.”
A larger company has more wiggle room with a business loan in terms of a default rate, while an SMB does not. An SMB might be highly profitable down the road, but that’s a little too much for a big bank to gamble with.
Therein lies a potentially large hurdle for any SMB to get off the ground.
Investing in the investors
As far as potential solutions for new SMBs that are taking a modern approach, instead of the traditional approach, Prosser has three main ideas for success.
- Providing the money to finance these small business loans
- Investing in the companies that make these loans
- Investing in those that benefit from small businesses having more access to credit
With something like a hedge fund or Funding Circle, there are ways, but they have their limits. A certain kind of investor can try, but they have to have minimums of $100,000 or more.
As far as a company that can make these kinds of loans, they’re few and far between. There’s IOU Central, which has a tiny impact on the stock market, and doesn’t look to expand beyond what they have now.
The picture that is painted might not look filled with vivid colors. But for SMBs, many companies have sprung to life despite the trends of the day. If the idea guides you to see success, no amount of growing pains can stop you.
Read more: Things to Consider when Pitching for SMB Funding