Multiple players offer diverse solutions to help small businesses (SMBs) manage their demand for financing. Yet despite intense competition and innovation among lenders, small businesses are still underserved for financing. A number of factors contribute to this shortage of available financers, such as the average size of a loan and accompanying risks. Due to this shortage, there is tremendous potential for lenders and marketers who want to compete in this space. Moving forward, small business owners will continue to have a healthy and growing demand for credit. So, how can proactive lenders get in on this valuable opportunity?
The challenge for SMB lending
When it comes to getting their financial needs met, SMBs are facing an obstacle that leads them away from traditional banks and toward financial tech solutions. The typical SMB is a business with less than $10 million in annual revenue (and often much lower). Simply put, SMBs want to borrow less money than banks typically lend. This is where they run into trouble, in the form of a conflict of interests.
The typical amount an SMB is looking to borrow is $50,000 to $100,000, but the minimum amount banks want to lend is $250,000. This is because when it takes the same amount of resources to underwrite a $100,000 loan as it does a $1 million loan, financial institutions will pick a median that optimizes their fixed costs—and that median is much higher than SMBs are looking to borrow. Ultimately, banks tend to overlook SMBs because of a combination of the size of the loan and the risk.
As a result, 53 percent of SMBs seeking funds in 2018 obtained less money than they wanted, leading to 32 percent of those turning to online lenders for funding. Top online small business lenders include PayPal, OnDeck, Kabbage, Square Capital, and Amazon.
The main products in this industry are the merchant cash advance and the term loan. In addition, many providers offer lines of credit, equipment leases, invoice financing and factoring, and SBA loans. These are typically high-priced products, with effective APRs in the 40 to 60 percent range.
The high prices are driven by three main factors:
- High loss rates (9-15 percent)
- Heavy acquisition costs (12-18 percent)
- High cost of funds (10-18 percent) to the lenders.
This phenomenon creates two interlocking effects:
A vicious cycle. Rising loan prices create higher default rates, which in turn create rising loan prices.
Loan stacking. This occurs when lenders are refinancing another lender’s customer into their own portfolio or extending additional credit behind the first lender. Stacking has become so common that some lenders actively invite second, third and fourth positions in the credit hierarchy.
Seizing the opportunity
Since 2008, small business optimism has steadily increased. And since 2016, small business capital outlays have averaged 60 percent. Estimates vary, but at least $10 billion in small business loans originate in the U.S. on an annual basis, including those businesses that are taking additional products. There is still a huge untapped market, both for businesses who are not borrowing and for those who have products not currently optimized for their needs. Lenders and marketers can continue to build new, innovative approaches and products to better serve the small business market, which in turn will continue to be a key driver of the economy.
Deluxe Marketing Solutions: Small business data and Pay-for-Performance
With the right data and a sophisticated marketing discipline, your organization can capitalize on this under-tapped opportunity. Deluxe provides multi-sourced small business data with over 400 attributes to create a higher-quality prospect record, including:
- Women-owned, minority-owned and small business indicators
- Commercial filings
- Existing loans
- Employee counts
- Franchise info
- Industry classification codes
- NAICS and SIC
- Sales volume—trending and actual
In addition, our unmatched, data-driven analysis helps lenders track campaign ROI and channel effectiveness. This unique data and proprietary analysis gives lenders confidence that they are reaching the right targets. But having the numbers isn’t enough; lenders also need a sophisticated marketing organization to capitalize on the leads generated by this data. For lenders that are unequipped to capitalize, Deluxe can fund and execute prescreen direct marketing campaigns in a cost-per-funded-loan model—Deluxe Performance Marketing.
Click here to download the whitepaper “Perspective on the Small Business Lending Market.” To learn more about Deluxe’s Small Business Data offering or Deluxe Performance Marketing, contact us today! Our experienced team is ready and willing to help your financial institution unlock success with adaptive tech solutions.