The continuing rise of marketplace lending to small businesses in the United States is providing sorely needed liquidity to companies that have been locked out of the economic recovery. This is good news for borrowers as new entrants into the small business lending space seems like a weekly occurrence.
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There are only a handful of companies in the business marketplace lending that are large enough to provide useful data with respect to the size of today’s market. Now that OnDeck is public, for example, we are able to see a clearer picture of typical loan sizes and volumes, though a sample set of one is obviously not enough to draw firm conclusions. What we can gather, however, is that the typical alternative business loan – one that originates online and is funded within a few days – appears to be between $30,000 to $40,000.
Because marketplace lending is now a known quantity and several well-capitalized firms have jumped into the fray, some trends are beginning to develop. For example, Original Funding works with business loan consolidation specialists who help companies consolidate credit card debt, equipment financing and even other marketplace loans in to one easily digestible lump sum. Therefore, there are two additional trends we can point to that relate to business loan debt consolidation activity. The first is that we’re seeing an extension in terms. Because borrowers are rolling up existing obligations and have a few options to choose from in the marketplace, they are beginning to ask for longer terms. There are caveats to this that we will discuss in a moment, but it is definitively a trend. The other tributary that has emerged is the tolerance to write bigger loans.
This brings us to the million-dollar question:
Do alternative lenders write $1,000,000 business loans?
The short answer is “yes.”
While $30,000 to $40,000 loans have defined the business marketplace lending space to this point, the appetite for larger deals seems to have grown. Consolidations have led the way in terms of the practical rationale behind this growth, but there are other factors at play.
Companies such as OnDeck and Can Capital have demonstrated that new players can be successful in business finance. On the consumer side, the growth has been even more explosive with companies such as Prosper and Lending Club leading the charge. Big money players at hedge funds and investment banks haven’t sat back idly while this has occurred. In fact, much of the liquidity on P2P exchanges is provided by traditional institutions. So while the technology has changed and there are new faces fronting these platforms, capital is still being originated by some of the most established players in the game.
As money flows into the alternative sector, defaults remain relatively low and the economy continues to grow, the tolerance for bigger deals seems to be raking root. It’s important to note that as the big guys get deeper into the game, the rules are shifting slightly and beginning to look very familiar. Here are some things you should know:
The bigger the loan, the longer you wait
One of the primary reasons that marketplace and P2P sectors have expanded so rapidly is that they employ faster technology. Notice we didn’t say “better.” Whether speed equates to success is something that will be borne out in the long run. We won’t truly know how successful online lenders truly are until the next economic hiccup (or worse). That said, automated decisioning only occurs when the loan amounts are relatively small. Typically a lender will run both a background check and the business owner’s credit score to get a baseline comfort level for the applicant. Original Funding partner lenders all examine recent financial data, bank statements and tax returns at a minimum. Then, depending upon several factors such as industry, time in business and other scores, the lender will assign a value to the applicant and determine whether or not the business is strong enough to support the debt requested.
The above process can take anywhere between two days and two weeks depending upon how quickly the applicant responds to document requests. But when a loan breaks six figures, things begin to slow down a bit. At a million or more, the process could take anywhere between three weeks and two months. Again, this depends upon numerous factors and there is no guarantee that an application will meet with approval from a lender. Regardless of how long the process takes, you can be sure that it will still be faster than traditional banking… for now.
Assuming you have outstanding debt and that is one of the reasons you are seeking a loan of this size, be prepared to retire all of this debt. Lenders typically don’t play well in the sandbox with others, unless they are "participating out" a loan purposely. Most alternative lenders who are willing to write a seven-figure loan are going to make sure they’re alone in doing so or, at the very least, ahead of everyone else.
Exceptions to this are common and fairly clear. For instance, mortgaged property and financed equipment. If a lender is going to take a second position on either a mortgage or financed equipment, they will ensure that there is enough equity to cover a potential default. Where an alternative lender will require first position is if there are other non-securitized obligations. Don’t be surprised if a portion of the loan is earmarked to pay off any such debt or if you are prohibited from seeking additional financing.
Collateral is essential
It would be difficult to envision a scenario where an alternative lender didn’t require collateral on a loan above one million dollars. Even in a business with extraordinary and consistent cash flow, security will likely be a significant part of the equation. This is one of the areas that alternative lenders can move faster than traditional banks. Pledging a hard asset doesn’t have to be a visit to the dentist so long as the asset is either free-and-clear to be assigned or has enough equity to get a lender comfortable with a second position. So even though this process is similar to what a traditional bank would ask for, alternative lenders tend to move faster in getting this done.
Million dollar loans are not only possible, but they happen all the time in the alternative lending universe. The process is still going to be faster than what a traditional bank can offer but the examination will be thorough. You will more than likely need to securitize a loan at this level and the lender will want to be in the first position.