The Life: A new crop of US websites that match small businesses with lenders aim to make securing loans easier.
Online loan matchmakers that US businesses can bank on
Shalinder Kular and his partners own about two dozen petrol stations and 15 Subway franchises in Indiana in the United States, employing more than 100 people.
During the financial crisis, their Indianapolis company, Hoosier Pete, could not get credit from its regular bank. So Mr Kular, a former accountant at Ernst & Young, turned to Biz2Credit, an online marketplace that matches small businesses with lenders.
Since 2009, the start-up, based in New York City, has helped Mr Kular's outfit land more than US$4 million (Dh14.6m) in commercial loans at what he calls "very nominal" interest rates from Borrego Springs Bank, headquartered near San Diego, California, more than 3,000 kilometres away.
Biz2Credit is one of a new crop of matchmaker sites that also includes BoeFly, CNF Exchange and Lendio. The middlemen are not lenders and do not act like traditional loan brokers, who tend to specialise in a single industry. Instead, the sites analyse would-be borrowers' financial data to assess risk, then funnel their assessments to banks, credit unions and alternative lenders.
The amounts requested generally range from a few thousand dollars to a few million. While the firms make no guarantees a deal will close, they trumpet approval rates of 70 to 80 per cent, along with the ability to slash the time it takes to process a bank loan from months to weeks. Executives at the four sites say they expect to complete more than $1.5 billion in lending this year, double the amount they handled last year.
The middlemen are "playing into a real weakness" among banks, says Sharon Chinn, a practice manager at the advisory firm Corporate Executive Board. Before the housing bust, many small business owners used their homes as money banks to fund operations. So "a lot of banks haven't, for a very long time, needed to invest in support and advice infrastructure for small businesses," Ms Chinn says.
That may explain why lending to small businesses has been contracting for four years straight, while lending to large companies began showing signs of recovery last year, according to the Federal Deposit Insurance Corporation.
Rohit Arora, the co-founder and chief executive of Biz2Credit, says his company's software streamlines the origination and underwriting process for borrowers and lenders.
When a company requests a loan through Biz2Credit, the site pulls and crunches data from sources such as credit bureaux, payroll and accounting service providers, and the Internal Revenue Service. Then it suggests a handful of matches from its 1,100-plus databank of lenders. The borrower and lender conduct the negotiations via Biz2Credit.
For banks, the attraction of going through a site is that it lowers the cost of acquiring new customers. "It's hours and hours of time and interruptions in trying to develop a borrower yourself, as opposed to one just being presented to you," says Jim Mueller, a vice president at Borrego, which started using Biz2Credit in 2009 and has funded about 15 deals through it.
While business models vary, most middlemen make their money by charging borrowers and lenders fees for using their site, as well as for extras, such as polishing a loan application. Biz2Credit typically takes a fee equal to 1 to 4 per cent of the loan from the lender.
Paul Merski, the chief economist at Independent Community Bankers of America, a lobby group that represents 5,000 banks, doesn't think the matchmakers will increase lending significantly. "Banks have pretty robust liquidity to do small business lending. Their number one complaint is new regulation, and their number two complaint is there's just not enough quality loan demand right now."
Biz2Credit is now expanding abroad. Mr Arora, a Delhi native, launched a sister site in India in February and plans to launch in Brazil by next summer.
The rise of the matchmakers intrigues Matthew Gamser, who heads the SME Finance Forum at International Finance, the World Bank's development arm. "For emerging markets, this model has enormous potential" to improve credit access for small businesses, he says. "Smart guys like Rohit [are] very important players."