Expanding Horizons | By Robert Fisher and Patrick MacKrell
Today’s small business owner has unprecedented access to fast and easy capital through a new source of financing – online lenders with low barriers to approvals but high APRs and short repayment terms that do not set businesses up for success. How can banks ensure that customers have a reliable place to turn when seeking a loan online? Excelsior Growth Fund and Tioga State Bank answer that question through an innovative online loan product and partnership.
Just a few short years ago, business owners had limited options when looking for financing to start or grow – friends and family, conventional or SBA loans with banks, loans from alternate lenders or community loan funds and/or home equity loans were the go-to sources for small business capital. However, today’s lending landscape is a whole new world, and with that new world comes a host of risks for both borrowers and banks.
Business owners, ranging from small flower shops to large manufacturing operations, now have access to an array of financing options available through online – also called marketplace – lenders. Many such companies emerged after the 2008 recession as technology-driven providers of alternative financing for those who no longer qualified with their banks. Once fringe lenders, these companies are now the business equivalent of household names.
On the surface, these lenders are attractive sources of financing. Their online applications can be completed in minutes and loans are often disbursed on the same day. Moreover, loosened requirements make it easy to qualify when bank financing is not an option. Yet the reward of fast, streamlined financing is not without perils: hidden fees, true APRs that top 40 percent, rapid amortization and weekly or daily payments can end up blindsiding unknowing businesses.
At the New York Business Development Corp. (NYBDC), we were seeing a growing number of businesses crushed under the weight of debt incurred from online sources. We felt a responsibility to ensure that both businesses and our bank partners have a product to turn to when conventional financing isn’t an option, or when a business seeks the ease and speed of an online process.
That’s why in August 2015, we launched the SmartLoan™ through Excelsior Growth Fund (EGF), NYBDC’s Community Development Financial Institution (CDFI) affiliate. The SmartLoan blends the speed and ease of an online loan with the trust and responsibility businesses can expect from a CDFI. Businesses are no longer forced to choose between speed and affordable payments. With the SmartLoan, qualified businesses can be approved for up to $100,000 in financing at an interest rate a fraction of what most online lenders charge in just two days, and have cash in-hand in just five business days.
For small businesses, this product means that they’ll find a lender that truly has their best interest at heart when they seek an online loan process. And for banks, the SmartLoan provides an online alternative from a trusted source that can meet a customer’s need for fast capital or take a second look when he or she does not qualify for a bank’s product.
When we at Tioga State Bank heard about the SmartLoan, we knew we had found the right product to fill a gap we were seeing with our customer base. We had been hearing from customers that they had gone online to borrow for accessibility and speed, but quickly felt the pressure from the repayment terms of the loans. In fact, for more than one customer, the amount of the daily debits the online lenders had set-up drained their account to the point where they could no longer make payments to Tioga State Bank.
Tioga State Bank and EGF have now partnered to provide access to the SmartLoan to relieve customers like these from the onerous payment terms of their online debt through a refinance or, importantly, to help those customers to avoid obtaining poorly structured online debt in the first place. Partnering with EGF was a streamlined process; it felt like we flipped a switch and had immediately added an online option to our product offerings.
Importantly, we know that when we refer a customer to EGF he or she will be treated with the same level of customer service and attention that they receive at Tioga State Bank. We appreciate that the service at EGF goes beyond the provision of a loan – EGF business counselors work one-on-one with borrowers to support them in leveling-up and becoming bankable. As the partnership grows, we expect SmartLoan™ borrowers to return to Tioga State Bank for conventional loans; this means that our relationship with the customer will continue to grow over time.
Online marketplace lending was a $7 billion business in 2015 alone. Tens of thousands of small business owners that felt they had nowhere else to turn, or who were wooed by easy access to capital, are now at great financial risk because of their online debt. Educating business owners on the risks of taking on high interest rate debt with quick repayment terms is no longer enough; we believe it is our responsibility to ensure that businesses can access trusted, responsible online lenders.
We’re not looking to become the next billion dollar marketplace lender. Both EGF and Tioga State Bank are just doing what we’ve always done – looking for responsible alternatives that can help our customers meet their financial goals. With the SmartLoan, we have found a product that does exactly that.■
Robert Fisher is the president and CEO of Tioga State Bank and serves as Policy Development Committee chairman for the 2016-2017 Independent Community Bankers of America board of directors. Patrick MacKrell is the president and CEO of New York Business Development Corp., The 504 Company and The Excelsior Growth Fund.