Writing for Fortune.com, former SBA Administrator Karen Mills weighed in on the changes occurring in the small business lending market. “Innovators believe disruption is a good thing. And many will tell you there’s no market more overdue for disruption than the banking industry,” wrote Mills.
She relates that 20 years ago that Bill Gates quipped that “Retail banks are dinosaurs.” Yet, today business owners still apply for loans at traditional banks in the same way they did in 1994 when the former Microsoft CEO made that comment.
“Don’t get me wrong, traditional banks have helped create a small business economy that has allowed millions to pursue their version of the American Dream. But over the years what has persisted is a loan process built around inefficiencies that drive high costs due to two realities: 1) It is difficult for willing lenders and borrowers to find each other. 2) Small business credit risk is hard to assess,” stated Mills.
Since 2007, technology has spawned new markets for lending, potentially transforming this industry in the same way it has travel, retail and others. The use of these new platforms has been on the rise since the Great Recession, due to either the ongoing feeling that banks remain unwilling to lend or that these new lenders are providing capital with greater efficiency. Or both.
Of course she’s right. Having spent over four years at the helm of SBA immediately following the financial crisis, Ms. Mills has a pretty good understanding of the banking industry’s response to small business lending.
There’s been plenty of information in this column about the innovative lending market and its evolution. Forward thinking small business lenders are starting to figure out how they will compete against with these new funders, mainly with their best advantages: superior pricing, consultative, face-to-face relationships and a greater range of financial products beyond loans.
Others are moving slower to recognize the world Karen Mills describes succinctly in this article. Be assured, it’s already here.