Fundera, a fintech marketplace that arranges loans for small business borrowers, announced the results of a lending survey conducted in the fourth quarter of 2015 that reveals medium-term loans are gaining market share while the proportion of short-term loans is getting lower. The collated data shows that in the fourth quarter, dollar amounts in the medium-term loan category increased by 15% while declining by 9% for short-term loans.
Fundera’s started collecting transaction data from small business borrowers in February, 2014, and through Q3 2015 shows that medium-loans accounted for 32% of funded dollar amounts while short-term loans comprised 34% of dollar value. Comparable data for Q4 2015 reveals that in this three-month period, short-term loan volumes had fallen to 24% of dollar volume while medium-term loans rose to 47%.
The rise in short-term loan volumes coincides with OnDeck and CAN Capital, two of the largest fintech finance companies, introducing lower-rate, multi-year products for small business borrowers, a shift in their lending strategy. The move to medium-term loans is of benefit to borrowers as these are normally available at lower APRs.
Fundera CEO, Jared Hecht, offered his analysis of the shift, saying, “Seeing two of the industry’s most prominent short-term lenders introduce multi-year products is an indication that it is an indispensable part of the SMB product mix. These short-term lenders will now be able to help their own customers graduate into longer-term loans instead of potentially losing them to competitors. It also signals that the medium term loan category will become increasingly competitive, which should benefit the business owner at the end of the day.”
The report issued by Fundera is based on the 1,900 loans mediated between February 2014 and December 2015. The lenders that Fundera works with include CAN Capital, OnDeck, bizfi, Funding Circle, Lending Club, Dealstruck and Prosper in addition to a number of other prominent companies in the alternative lending sector.
Fundera’s data confirms that alternative lenders play an important role in providing finance to those small business borrowers who find it difficult to access funds from the traditional banking sector. Although there are few borrowers who manage to secure funds if they have both poor credit scores as well as low revenues, there are many customers who have mid-level credit scores and annual revenues in the middle category who are able to obtain funds from alternative lenders.
Only about 6% of borrowers have credit scores below 580 while approximately 28% have scores in the 620 to 660 range. Less than 25% of customers have credit scores above 700. Annual revenues also play a critical role in helping lenders decide on the creditworthiness of a borrower. According to Fundera’s data, a negligible number of customers had revenues less than $50,000. About 35% of borrowers had revenues in the range of $100,000 to $300,000.
Their data also reveals that a wide range of small businesses use alternative lenders to meet their finance needs. Borrowers classified under the ‘merchandise’ sector and those categorized under ‘restaurant/café/bar lounge’ make up about 8% each of the total of 1,900 loans.
Consultancies and marketing companies make up an additional 5% each. Customers in other fields account for the remaining borrowers. There are 65 industry categories that have used Fundera’s platform to find the best lender indicating the diversity of borrowers who are accessing funds from the alternative financing sector.
Alternative lenders are playing an increasingly important role in financing small businesses. For many business owners who are rejected by banks, they are the next best option. Another reason that small businesses find online lenders attractive is that they have highly automated approval processes and can decide on a loan application and fund it in a matter of days. In addition to these features, they require less paperwork to confirm their underwriting. Business owners find this to be a very appealing.
But with new online lenders entering the market at a rapid pace, small business borrowers are faced with the problem of deciding which alternative lender can best meet their needs. Marketplace companies like Fundera that match borrowers with lenders serve an important role in helping to sort out choices available.
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