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Next Read: A Walkthrough of Your Business Loan Agreement
Lending marketplaces have reinvented the lending business, making financing faster to apply for and easier to qualify for. This hasn’t always been the case, however. In the not-so-distant past, loans mostly came from banks. If you needed to borrow money, you’d drive to your nearest bank and plead your case. The good news was that the banks had money to lend. The bad news was that the application process could take 30 hours and the majority of requests were denied.
If you were an entrepreneur who was just getting started, your prospects were particularly grim. Most banks commonly rejected applications from those who had been in business for less than 2 years or brought in less than $100,000 in revenue each year.
As a wise person once said, “Necessity is the mother of invention.” In the case of lending marketplaces, that necessity came in the form of the financial crisis of 2008. Capital was harder than ever to come by and business owners needed more options for financing.
While the banks weren’t willing to play ball, plenty of lenders still would. There just needed to be a way to connect them with borrowers. Enter the modern lending marketplace. These lending marketplaces, built on a model of access and efficiency, proved to be an answer to the funding shortage. As more and more entrepreneurs took advantage of this new tool, lending marketplaces exploded in popularity. The US Department of the Treasury has noticed this trend, referring to marketplace lending as “a fast-growing sector that is continuously evolving.”
At the heart of the matter is the approval rate. If you go with a bank, you’ll be turned down about half of the time. Going through a marketplace boosts your chances of success to 70%. The streamlined nature of the marketplace process also cuts costs and red tape simultaneously.
“Designed as a two-sided platform structure, marketplace lending brings innovations to traditional banking on both the borrower and the investor side,” says the Harvard Business Review. “The innovation on the borrower side relies mainly on streamlining an online application process that uses low-cost information technology to collect standardized information from dispersed individual borrowers on a large scale.”
A lending marketplace usually offers a wide range of loan products. Due to the variations of dollar amounts, rates, and terms, it’s recommended that you speak with an expert any time you have questions. The best marketplaces provide advisors who can help you. The bottom line is that you never want to sign on the dotted line until you feel informed and ready to make a decision.
As lending marketplaces shake up the financing world, some people have wondered whether or not they’re just a flash in the pan. The experts at Deloitte analyzed mountains of data to help answer this question, concluding that marketplaces will remain a “permanent part of the landscape.” The reason? There will always be people who need money but who can’t get a loan through a bank.
The evolution of marketplaces will undoubtedly include more diverse loan product offerings and better ancillary benefits. For example, the Innovative Lending Platform Association has released a tool called SMART Box™ (Straightforward Metrics Around Rate and Total cost). It promotes clearer disclosure standards and provides pricing metrics and calculations to help you make informed decisions.
“Access to capital is a top priority for NSBA and we appreciate how SMART Box allows small businesses to more fully assess and compare lending options,” says Todd McCracken, president and CEO of the National Small Business Association. “This type of price transparency, along with best practices like the ones adopted by the Coalition for Responsible Business Finance (CRBF), will help solidify the trust between non-bank lenders and small businesses.”
There are 3 different versions of SMART Box™ customized for merchant cash advances, term loans, and lines of credit. And additional tools and resources are currently being developed.
This effort to create value undoubtedly benefits borrowers, which is why those in the lending marketplace industry are so motivated to provide it. After all, innovation is never easy. Rather than rest on their laurels, lending marketplace leaders must remain focused on their customers’ evolving needs to stay relevant and continue providing effective service.
Most small businesses that apply for bank loans are denied. That doesn’t mean their capital needs disappear. So where should businesses turn when they need a loan? Lending marketplaces have taken up the mantle, providing small businesses the opportunity to compare offers from multiple lenders.
The benefit of applying for a business loan through a marketplace is getting access to multiple lenders in one spot. As such, the draw of a marketplace is only as strong as its lenders. Before you settle on a marketplace, look at their list of lenders. You can expect to see financial technology (fintech) lenders and many smaller lenders. What should you look for? You want to see at least 1 or 2 names you recognize. You may see OnDeck or other names you recognize. You can also do a quick Google search on some of the lenders to check their reviews. If the marketplace is full of smaller lenders with great reviews, that’s a good sign, too.
The benefit of applying for a business loan through a marketplace is getting access to multiple lenders in one spot. As such, the draw of a marketplace is only as strong as its lenders. Before you settle on a marketplace, look at their list of lenders. You can expect to see financial technology (fintech) lenders and many smaller lenders.What should you look for? You want to see at least 1 or 2 names you recognize. You may see OnDeck or other names you recognize. You can also do a quick Google search on some of the lenders to check their reviews. If the marketplace is full of smaller lenders with great reviews, that’s a good sign, too
Variety is the spice of life, and a primo lending marketplace should make you feel like you’re exploring a top-notch breakfast buffet (pre-COVID). If all they have is cereal, it’s going to be a no-go. In addition to the cereal, you want to see some metaphorical fruit, bagels, bacon, and a customized omelet station. So what does that look like for a lending marketplace?
You can expect to see business term loans. That’s the traditional loan people tend to think of when they picture a small business loan in their heads, but there are tons of other loan options that may be more tailored to meet your business’s specific needs. Equipment loans can help you finance everything from a tractor to computer equipment. ACH loans offer rapid financing when cash flow is your primary concern. Business lines of credit offer you financial flexibility and the opportunity for repeat borrowing.
A robust lending marketplace will offer products like:
The ideal lending marketplace marries the ease and convenience of technology with the customer experience that comes from being able to talk to human beings. Check to see if the lending marketplace matches you with someone who can walk you through the process. If an issue comes up, do they have a customer service line? You can get a good sense of a lending marketplace’s customer service by checking their Trustpilot reviews and taking a glance at their Twitter account. Do they seem responsive?
There are two ways for a lending marketplace to make money. They can charge a fee to the lender, or they can charge additional fees to the borrower. Watch out for application fees and ask if there are any additional fees you can expect to be charged. Also, be aware that once you’re approved for a loan, many lenders will charge an origination fee (a one-time fee to cover the administrative costs of servicing the loan). Those are charged by the lender, not the marketplace, and they can be expected as a pretty routine part of the process.
Applying for a loan requires you to enter sensitive financial information. You want to choose a lending marketplace with a secure application and portal to ensure your information is protected.
Most business owners aren’t experts in small business loans, and that’s OK. A good lending marketplace should match you with someone who is. A loan expert can answer any questions, help you compare lenders, and walk you through the finishing touches of your application and set you up for success when applying.
Look for lending marketplaces that perform soft credit pulls on the application. A soft credit pull doesn’t affect your credit, so if you decide not to apply for a loan, no sweat. A hard credit pull will affect your credit. Once you settle on a lender, you’ll likely have to do a hard credit pull, but that shouldn’t happen at the time of the marketplace application. Think of it like this: a reputable department store wouldn’t swipe your credit card just for walking through the door.
Checking review sites like TrustPilot, Yelp, Glassdoor, Facebook, and Google Reviews can give you insight into what kind of experience past customers have had working with your lender or lending marketplace. Was the lender or lending marketplace transparent about the process? Were they communicative? What surprises occurred along the way?
Ask how quickly you can get funded. Some lenders can fund in as little as 24 to 72 hours after approval. Time is money, and getting a $50,000 loan in 6 weeks isn’t any good if you need $20,000 in the next week.
Many small business owners won’t meet the qualifications when applying for a bank loan. Lending marketplaces should give you a sense of whether or not you’ll qualify. Because qualifications vary from product to product, you may have to check out the product page for a specific loan to get a sense of the qualifications. Ultimately, it’s all an estimate, but a reputable lending marketplace should give you a sense of what to expect before you apply. We’ve been working to make access to business capital more accessible since 2011. When you apply through Lendio, you can access offers from our network of 75+ lenders. You wouldn’t book a flight without checking prices from multiple airlines, so why secure a loan without seeing what all your options are? Apply now to start comparing.
Applying is free and won’t impact your credit.
Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.
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