A report from Morgan Stanley states that online lenders lent a whopping $7.9 billion to small business owners in the US and Canada in 2015. The report also highlights lending growth of 68 percent year-on-year. This indicates that online lending is gaining a foothold in the small business market and helping small businesses flourish and thrive.
Financial experts believe that online lending still has scope for increasing its market share. It has already managed to capture 3.3 percent of the lending market that caters to small business owners. If the current trend continues, online lending will represent 20 percent of the total lending market by 2020, and it could well turn into a $200-billion-a-year market.
Karen Gordon Mills, author of “The State of Small Business Lending: Credit Access During the Recovery and How Technology May Change the Game”, believes online lending is more popular with small business owners than traditional lending sources because banks are reluctant to approve and process small loan amounts. She says banks do not view these loans as being cost-effective. Moreover, traditional lenders have strict credit score requirements that small business owners may not always be able to meet. This has created a gap that online lenders are now trying to fill by offering small businesses alternate sources of funding.
At the moment, small businesses have access to three models of online lending. One is the peer-to-peer lending model that connects prospective borrowers to retail and institutional lenders. This type of lending focuses on borrowers who are unable to get loans from traditional banks. Another type is the small business lending model, where the online lending platform raises funds from institutional investors and then lends the money to small business owners. Finally, there is the online marketplace, which connects borrowers to several lenders, including conventional lenders. This increases the chances of getting the loan.
Small businesses often look to traditional lenders to secure funds. Many times, they may not get access to the funding that they need to grow and expand their business. Furthermore, many small business owners are unaware of alternate sources of lending, such as online lending. That is why advocates of small businesses feel there is a need to educate small business owners about these alternative options. This, in turn, would give a boost to the economy in Canada and also improve industry growth.