Much has been written about Fintech and the online lending industry regarding how it’s going to disrupt the banking industry. As credit markets tightened, many small businesses were unable to secure financing from traditional banks, so they were left to look elsewhere.
For the business owner who has just been declined for a small business loan, the options seemed endless. They would just go online or turn on satellite radio and there were a handful of companies offering to have up to $250,000 deposited into their bank account within 24 hours.
Simple and efficient, the quick access to working capital was set to revolutionize the lending industry. However, eventually reality sets in for the small business owner who realized that the daily ACH being pulled out of their bank’s deposit account was more than they could handle. Of course, what initially seemed easy ($150 per day, $250 per day or more) became unsustainable putting the company right back into tight cash flow position they were in not too long ago. The uninformed small business owner likely did not realize that the rate for these loans can range from 30% to upwards of 50% – 70% annualized.
What happens next? More online lenders approach the same small business; offering to give the company more money. With no other options, the small business takes out another working capital loan and the vicious cycle continues.
Over the last couple of years, we’ve seen this example too many times. We’ve talked to companies that signed deals with online lenders that offered fast access to cash only later to realize that they made a huge mistake. Often their banker, CPAs or other trusted advisors weren’t involved initially and likely did not find out about it until trouble started. Had we gotten involved in the beginning, we could have helped educate the borrower regarding the pitfalls of fintech.
While borrowers are attracted to convenience and quick access to cash, it’s important to remember how valuable a personal relationship can be to a small business. While traditional banks likely will never be able to compete with the speed of fintech, these online lenders cannot compete on customer service or the invaluable guidance, wisdom and advice that comes with a real professional relationship that a business banker or commercial lender can offer.
When bankers take on the role as a trusted advisor, that small business client will not jump into a potentially damaging alternative lending relationship without consulting that banker.
Here at Magnolia Financial, most of our new client relationships come from banker referrals. That’s because we take the time to consult with banks and not compete with them. We simply are available to provide an interim financing solution for the company that is not currently bankable but may be in the future. The small business that is not able to secure a traditional bank line of credit still needs a deposit relationship. The company may also qualify for a real estate loan or equipment financing. Just because the bank cannot provide the company with a working capital line of credit doesn’t mean that they cannot provide the company with additional services.
Regardless of how quickly an online lender can fund a small business, they will never be able to compete with the personalized relationship that a commercial lender can and should develop with a small business owner.