Decade after financial crisis, American small businesses move on from ‘bank first’ approach to financing

A new report published today by Oxford Economics found that a decade after the financial crisis, American small businesses continue to be neglected by banks. These smaller businesses are increasingly turning to non-bank providers for their financing needs, enabling them to drive the broader economy forward.

The “Big Business of Small Business” report, launched in partnership with Funding Circle, finds that despite the vast economic output generated by small businesses, banks are continuing to focus on loans to larger companies. The report shows that while commercial lending is increasing overall, banks relaxed their approval standards and interest rate spreads for loans to large and middle-market businesses much more than they did for small companies in 2018, putting smaller businesses at a disadvantage against larger competitors. Small businesses are responsible for 47.5% of US employment, but lending to this segment remains a tiny proportion of US banks’ overall balance sheets (0.7%).

As a result, small businesses are increasingly moving on to alternatives offering a faster, more efficient experience without sacrificing on cost and transparency. In 2018, 32 percent of US small businesses seeking finance turned to online providers, up from 19 percent two years prior. This access to affordable business credit creates a ripple effect throughout the economy.

Highlights of the report include:

• On average, US small businesses who had previously applied for a bank loan reported taking 8 hours to complete that application. These customers then waited 1 to 3 weeks (33 percent of respondents) or more than a month (30 percent) to hear back on the bank’s decision. At Funding Circle, businesses apply online in 10 minutes and receive a decision in as little as 24 hours after document submission.

• 72 percent of Funding Circle’s US customers surveyed made Funding Circle their first choice for financing, ahead of a bank. The primary reasons for borrowing through the platform included Funding Circle’s speed, simple process, and better terms compared to other options.

• Every $1 lent to a small business through Funding Circle contributed $2 to GDP — adding up to an annual contribution of $8.7 billion to the global economy, including a GDP contribution of $2.8 billion to the US economy in 2018 alone.

• With financing obtained through Funding Circle, small businesses created and sustained 115,000 jobs globally, including 38,000 jobs in the United States in 2018.

Funding Circle offers a 21st-century approach to accessing business loans, with a simple online application process powered by innovative technology and advanced data analytics. Over the course of 2018, Funding Circle facilitated $792 million in new loans to US small businesses, capping off a four-year period where new loan issuance grew at a compounded rate of 92 percent per year. In the US, Funding Circle’s portfolio of outstanding small business loans is larger than almost 98% of FDIC-insured banks’. Recently Funding Circle was named both Top Small Business Lending Platform by the LendIt Fintech Industry Awards, and Top Small Business Lender for Low APR by US News. Last week, LendingClub, Opportunity Fund and Funding Circle announced a collaboration in which LendingClub will connect applicants looking for a small business loan to Funding Circle.

Bernardo Martinez, Funding Circle US Managing Director, said: “At Funding Circle our roots are in small business and we remain committed to delivering a better financing experience for US business owners so they can continue to push the economy forward. It’s rewarding to see that 84 percent of Funding Circle’s customers say they would return to Funding Circle first in the future, and this is motivation for us to continue working to exceed their expectations.”

Sam Moore, Managing Director of Economic Consultancy, Oxford Economics, said: “This report offers a stark reminder both of the critical role that small and medium-sized enterprises (SMEs) play in all four countries analysed, and the uphill challenges they face when dealing with the traditional banking sector. This could act as a serious curb on future growth, so the substantial increase in Funding Circle’s lending profile from 2017—and the huge impact it is having across all four economies—should be welcomed by policymakers and every sector of the business community.”

Samir Desai, Funding Circle co-founder and CEO said: “Today’s news highlights the extent to which technology has transformed the financial landscape, and the increasing importance of online lending to small businesses. This sector has been hugely underserved globally for decades despite the economic importance of SMEs. Small businesses mean big business, and that’s why we’re passionate about helping them to succeed.”

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