New alternative financing options, fueled by Big Data, make it easier for small business owners to get funding without relying on credit scores. Here's what you need to know.
Getting a business loan has always been fraught with obstacles for many small business owners, but the recent recession made things even harder. Initially, traditional lenders stopped making any loans at all. Then they started lending again, but they set the qualifying bar much higher.
That bar became even harder to hurdle after the recession left many small businesses owners with less-than-stellar credit scores. Fortunately, the lending game has completely changed—thanks to Big Data—and it is the traditional lenders, not small businesses that will be left behind.
A New Breed of Alternative Small Business Lenders
"Banks look back at past history, while alternative sources assess past, present and future opportunities," explains Karlene Sinclair-Robinson, author of Spank the Bank: The Guide To Alternative Business Financing.
And how do alternative lenders assess a small business' present and future opportunities? They use big data tools and techniques, including predictive analytics, to see what's in your business' future.
"Small business and commercial lending has seen great disruption due to the incorporation of big data," says John Lynch, marketing director of Express Business Loans, formerly Citi Wide Merchant Funding. "Hundreds of data points are now incorporated into the underwriting process."
It's natural to wonder if traditional banks use big data tools and techniques too, and the answer to that is yes, they do. However, they still stick to the old model of primarily considering credit scores from traditional credit bureaus rather than balance the scales with new, more relevant information.
"Credit conditions in the small business market continue to remain tight even though commercial banks began easing lending conditions in mid-2010," according to a spokesperson for PayPal. "In August, according to a report by The Federal Reserve Bank of Cleveland, the total value of small business loans in the fourth quarter of 2012 was 78 percent less than in the second quarter in 2007."
Alternative lenders on the other hand, consider all the data in a more equitably weighted fashion. The result is a fairer and often far more positive consideration of your loan request. The terms can also be better for your cash flow as some lenders don't require a set monthly payment, and most of the lenders loan the money quickly.
Alternative Funding Sources for Startups
If your company is just getting started, you'll likely fare best with alternative funding sources geared towards startups.
"Banks do not give loans to new companies, and they're very selective even with established companies, which is why entrepreneurs almost always have to use other lenders," says Alex Genadinik, founder of Problemio, the company behind some of the top mobile apps for planning and starting a business. "Some popular lenders are Lendio and Prosper. Crowdfunding is also popular."
Popular crowdfunding sites for both startups and established businesses, include Crowdfunder, Somolend and AngelList.
New Alternative Funding Programs
PayPal recently launched an intriguing new program, called PayPal Working Capital, for businesses that accept customer payments via PayPal. Unlike traditional bank loans and credit cards, PayPal doesn’t require a credit check, because a business's credit worthiness is based on the strength of its PayPal sales.
"WebBank is the lender for PayPal Working Capital, and since WebBank is responsible for verifying the identity of the applicant, it must use a trusted third-party for this verification," says PayPal's spokesperson. "PayPal chose Lexis Nexis as the partner for this verification, and many large banks use Lexis Nexis. Buyers are qualified based on their PayPal sales history."
There's also no set monthly payment, since PayPal allows a business to repay the loan with a share of its PayPal sales. When there are no sales, there is no payment due.
"It's a revolutionary concept that allows PayPal merchants the flexibility to pay when they get paid," says PayPal's representative. "PayPal Working Capital does not charge periodic interest. Instead it offers one affordable fixed fee that a business chooses before signing up—there are no periodic interest fees, no late fees, no pre-payment fees, or any other hidden fees.
PayPal's rep pointed out how this practice compares to traditional credit, where "businesses report they seldom know how much they ultimately pay in interest and other fees."
More Alternative Small Business Funding Programs
Amazon launched a similar program last year called Amazon Capital Services. The Wall Street Journal reports that this funding source is primarily by invitation:
"Merchants who spoke to The Wall Street Journal said they were offered loans ranging from $1,000 to $38,000 apiece, with interest rates from less than 1 percent (for one of them) to 13.9 percent (for most who were interviewed). Small-business credit-card interest rates typically range from 13 percent to 19 percent."
An Amazon spokesperson told The Wall Street Journal that the company is "looking to help sellers obtain cash more quickly than they might otherwise from a bank or other traditional lender. Our goal is to solve a difficult problem for sellers."
Another player in the alternative funding game is CardConnect, a payment processing service for some 50,000 U.S. businesses. The company processes credit, debit and pre-paid card transactions and offers ERP integrations and PCI compliance solutions as well.
CardConnect recently partnered with OnDeck, a lender that uses data aggregation and electronic payment technology to evaluate the financial health of small and medium sized businesses. The partnership provides immediate capital to small businesses that are underserved by traditional banks.
"Small and medium-sized businesses are continually inhibited from taking advantage of time-sensitive opportunities that require additional capital, whether it be due to the slow-moving approval process by a bank or external economic factors like a government shutdown," said Pat Shanahan, COO at CardConnect. "We wanted to make sure our clients always have an avenue to secure funds quickly and fairly."
Retailer Loyalty Credit Cards
If a small business or its owner has ample money in a traditional bank, but it also has slow or thin credit, it can still be hard to get a bank-issued credit card. A way around this obstacle is to get a retailer-branded credit card instead. It's far easier to qualify for, and it often comes with much bigger spending limits.
A retailer-branded credit card, also known as a partner card, doubles as a store credit card AND as a major credit card—i.e. Visa, MasterCard, American Express—that you can use elsewhere other than at the store that issued the card.
Retailer cards are almost always backed by a third party such as CITI or Bank of America," explains Bob Lawrence, CEO of BrandSource, a nationwide buyer's group for independent merchants. "Major retailers offer them to reduce the costs charged by American Express, MasterCard and Visa, but smaller retailers cannot generate enough volume to pull it off."
Smaller businesses can, however, get these cards more easily and use them the same way they would use a bank-issued card to cover or float expenses.
"Loyalty cards are only beneficial if the loyalty program is a good fit for the small business owner's spending habits," says Ben Katz, CEO of Card.com, a personalized prepaid debit card company. "If you travel a lot, go with your favorite hotel or airline. If you buy supplies from Home Depot, then the benefits from that card will be more valuable."
It's All About Your Data
So why, you might ask, do banks make it so hard for small businesses to qualify for a bank-issued credit card? After all, it's the banks that are backing the much easier to get store branded credit cards.
It is because of your data. The bank backing the card, the credit card company, and the retailer get their hands on more of your data by giving you a store-branded card than they do through traditional bank-issued cards.
"Data is a major piece of the puzzle," says Lawrence. "It gives them point-of-sale data on what's selling and where. It also gives them specific data on a particular customer. All of this allows them to do very specific marketing. Now they can be more effective and at a lower cost while increasing sales."
Plus the retailer-branded credit cards get wider distribution than their bank issued counterparts, and customer loyalty is much higher too.
"Moreover, store brands are actually liked by their customers, whereas banks have a spotty track record on customer happiness," says Katz.
And that's exactly why the traditional banking model will eventually be left behind in this new Big Data-driven world. Traditional banks are too stuck in yesterday's thinking, too married to an outdated credit reporting and scoring process, too slow to meet market needs, too hostile towards small business and entrepreneurs, too much of everything wrong.
But while banks struggle to figure out what to do next, you can carry on with your business despite them by taking advantage of all the new funding sources and credit cards bursting on the scene.
Just be careful. You still need to carefully weigh terms, interest rates and other factors to ensure you get a good deal.
Pam Baker has written for numerous leading publications including, Institutional Investor magazine, CIO.com, NetworkWorld, ComputerWorld, IT World, Linux World, Internet News, E-Commerce Times, LinuxInsider, CIO Today Magazine, NPTech News (nonprofits), MedTech Journal, I Six Sigma magazine, Computer Sweden, the NY Times, and Knight-Ridder/McClatchy newspapers.
|Do you have a comment or question about this article or other small business topics in general? Speak out in the SmallBusinessComputing.com Forums. Join the discussion today!