Today, small businesses struggle to get access to debt with average loan approval rates being as low as 30%. As a direct response to this unmet need (estimated to be $80-120 billion in loans a year), online alternative lenders (e.g., Lending Club, OnDeck, Funding Circle) have emerged using algorithmic based pricing models and big data to reduce the underwriting process of a loan from 2-3 months to 3-4 days. Despite the brief description above, usually borrowers are left with more questions than answers:
- How does the online lending process work? What is an algorithm? Big Data what?
- Are all alternative loans the same?
- Does an alternative loan make sense for my business?
Over the course of the next few weeks, Camino Financial will release a series of articles attempting to demystify online alternative lending. We plan to discuss i) online lending process, ii) different types of alternative products, and iii) whether an alternative loan makes sense for your business. This week’s article will focus on the online lending process.
Online Alternative Lending
Instead of asking for extensive financial information and paperwork, alternative lenders use technology to pull business information from big data sources such as credit bureaus, QuickBooks and social media (e.g., Yelp, Facebook). In addition, the prospective borrower is asked to fill out a one-page application form and provide the latest 3 months of banks statements. Based on the bank statement transaction volume and frequency, online lenders are able to estimate the cash flow of the business to underwrite a loan.