1. Online lending will continue to flourish
This one is a bit obvious, but small businesses will continue to turn to alternative online lending sources — as they have since the wake of the 2008 financial crisis — in 2016.
A Harvard Business School report from 2014 points out that alternative forms of lending for small businesses have been growing since 2008, with traditional banks being more reluctant to lend small businesses money. These online small business lenders are more willing to take on risk and they provide new avenues for small businesses to procure capital, but those aren’t the only reasons small businesses are using these alternative sources of funding.
As the Harvard report notes, modern entrepreneurs enjoy the simplicity and ease of the lending, which is largely facilitated by technology.
“The growth is also driven by the ways in which alternative lenders are ‘innovating’ in small business lending, particularly in terms of simplicity and convenience of the application process, speed of delivery of capital, and a greater focus on customer service,” the Harvard Business School report says.
2. With online lending flourishing, the call for greater transparency will also continue
Online lending facilities are not governed by nearly as many regulations as traditional banks. This can unfortunately lead to a lack of transparency, as some less scrupulous lenders tack on hidden fees and fail to disclose the annual percentage rate up front.
“Business owners are getting into loans with incredibly high interest rates and high payments,” says Sandy Mackovich, director of outreach and business development at San Francisco-based lender Working Solutions.
Lack of transparency has become such a concern with these alternative lenders that in August of 2015, a group of lenders actually got together and created the Small Business Borrowers’ Bill of Rights. This online document is meant to serve as a framework for how small businesses should be treated by lenders. Small business lenders are asked to ratify the bill to show their support. Companies that aren’t lenders but agree with the guidelines can endorse it.
Just before this Bill of Rights was introduced, the Treasury Department started sending out feelers by way of a request for information to lenders in the industry and now lawmakers are asking about a regulatory framework for the industry.
These steps toward more transparency (and potential regulation) will increase in 2016 and whether through self-governing or by actual government regulation, more transparency in the industry is a good thing.
3. Despite growth of alternative lenders, SBA loans will remain the preferred choice
Government-backed loans issued by the U.S. Small Business Administration are still coveted by small business owners. In fact, the 7(a) loan guarantee program has proven so popular, that it had to be suspended for a time when it ran out of funds.
While the process of procuring an SBA loan is tedious and can take months, that is set to change in 2016, as the agency rolls out new online tools that will bring it closer in line with modern lending practices.
One of these tools is SBA One, which is meant to automate the loan process. It allows lenders to verify all the information on an application online and in real time, communicate with the SBA better, minimize physical paperwork and provide immediate responses to questions.
Another is LINC, which is meant to connect small businesses with SBA-affiliated lenders much quicker and easier than before. Standing for Leveraging Information and Networks to access Capital, borrowers can log in and fill out a questionnaire that will then be forwarded to a pool of lenders, making it easier to match borrowers and lenders.
With the SBA making things quicker and easier to procure funding, it should continue to remain as the preferred choice for small businesses in 2016.
These are just three of the trends that will affect small business lending. Whether the burgeoning online lending industry will have any regulations handed down or how much these new online tools will speed up the process of getting an SBA loan will be items to watch for in 2016.
What trends do you think we will see in 2016?
[Photo courtesy of Denise Cheng on Flickr]