By Samuel C. Li, Santa Barbara SCORE Team Member
“Banking 2.0” is a term that I have used over many years to describe offerings which incorporate current technology to access, assess, and manage financing. These offerings use relatively new tools such as social networking, alternative credit worthiness models, and communication techniques to deliver Financial Services products. To a small business owner, they can provide alternatives to banks, credit unions, finance companies, equipment leasing firms, and credit card companies. These new sources for business financing are accessed online, using proprietary evaluation models to assess the borrower’s credit risk. The companies providing these services tout their abilities to reduce time and effort involved in the process. The types and uses of the services can vary widely, depending on the nature of one’s operations and business structure.
Lending Club and its close competitor, Prosper, are examples of this new trend that use term loans as the financing vehicle. The products are akin to home mortgages or auto loans, with repayment on set schedules. One of the unique elements of these companies is the fact that loans are “peer-to-peer” funded by individual or institutional investors. Because the loans are not sourced from a single lender, the credit request “approval” relies upon crowd-funded willingness and timing in the process. The loans are generally based on the business owner’s credit rating and less on his/her company. For an individual having an acceptable credit profile, they might serve as a financing alternative.
OnDeck and Kabbage are other ways that a small business can access funds. The current and expected cash flows of a company provide support for the credit request, with repayment directly deducted from a business bank account. Because credit approval is based upon business operations, the owner’s historical credit history may be less of an issue. These lenders claim quick responses to requests and streamlined submission processes; however, the cost of the offerings can be higher than other sources.
In the socially responsible realm, Kiva Zip might be another avenue to explore. It is an offshoot of Kiva, a global nonprofit using microfinancing to target reduction of global poverty. Based on a social-networking funding platform, it expands the parent’s mission to provide capital for economically disadvantaged and/or socially conscious endeavors. The amounts are relatively modest and are subject to peer-funding approval (with time frames similar to the aforementioned peer-to-peer lenders). However, the cost of this source is attractive (currently at the extremely affordable interest rate of 0%, after an origination fee deducted from the borrowed amount).
All of these aforementioned capital sources represent only a small sample of possibilities within this new universe. Thus, SCORE does not make recommendations for or against the use of any of them. SCORE also does not have a “recommended list” of particular sources. Each claims superiority with respect to its ease of access, quick response times, and affordability. However, they may or may not provide advantages to a specific small business. Their usefulness is often highly dependent on the loan purpose and repayment terms. In addition, these types of lenders frequently require personal guarantees of the debt (i.e., the agreement by the business owner to repay the debt personally when the company cannot directly service the obligation).
As a result, it could be advantageous to work with traditional lenders (e.g., better pricing, ability to renegotiate loan terms, and access to additional products/services). To determine one’s best course of action, it might make sense to schedule time with a SCORE mentor to discuss the alternatives and the potential impact on one’s business. Our team of dedicated professionals has the skills and backgrounds to help a small business safely navigate these Banking 2.0 waters.