Small business in the United States began its development in the era of the Great Depression, so its level remains consistently high. Federal programs, which are just beginning to be developed in some countries, in the United States date back to 1932. At this time, after the Great Depression, the state began to subsidize small businesses that suffered as a result of the war. At that time, it was small business that provided jobs in the United States, emphasizing its important social significance.
In 1953, the United States created a Federal Agency – the US Small Business Administration, which to this day defends the interests of small businesses at the government level. Moreover, the branches of this organization are located in all major cities, thus, the policy of supporting small businesses applies to all states, and not only to the main economic centers of the United States. The main tasks of the Small Business Administration and its branches:
- assistance in obtaining a loan for a business;
- technical and informational support for small businesses in the United States;
- providing loan guarantees for business;
- direct subsidizing and lending to small businesses from their own budget.
The United States has a very well-developed system of criteria by which small business is defined. These criteria depend on the type of the small business and the industry in which it operates. In some areas, the determining factor is the number of people working at the enterprise, in others – turnover and profit.
In addition to the Federal Small Business Law Compliance Agency, a dedicated Attorney Section has been established to defend business interests in court and in Congress. The US authorities assign one of the main roles to small business in their concept of economic development. In the reports of US government ministers, one and the same idea constantly creeps in that small business is an important lever for the recovery of the entire economy as a whole.
Three ways of business loans
It’s no secret that it is becoming more and more difficult for small businesses to get a bank loan. And we are not talking about a specific case in a particular country. The problem is global. At the same time, fortunately for small businesses, there are now many other ways to borrow money. They range from short-term loans for borrowers with bad credit history, to loans for internet business and p2p lending. The biggest advantage of the new types of lenders is not just the loan products they offer, but the technology they use to make lending more efficient.
Below there are three companies that have proven themselves in practice and are transforming the financial market in the small business segment in the United States.
Loans for the development of small businesses, which are issued by commercial banks mainly with the support of the US Small Business Administration (SBA), have gained particular popularity in the United States. These loans are very attractive for small businesses because they are provided for longer terms and at lower interest rates than most other loan products.
The catch is that the small business loan process traditionally takes 4-6 weeks, and many business owners are not in a position to wait that long for funding. After submitting the initial documents to the bank, it may take 1-2 weeks just to get approval in advance for a small business loan. After that, the process of assessing the borrower’s solvency may take another 2 weeks, then another 1-2 weeks for the loan to be repaid back.
San Francisco-based SmartBiz empowers and simplifies this often painful small business loan process. The company has cut the total time it takes to finance a small business loan to $ 150,000 to just one week. Borrowers can upload all documents electronically in the online application, or send them by email. SmartBiz has an algorithm that allows you to quickly assess the creditworthiness of a potential borrower based on the documents submitted in electronic form. As a result, the client receives approval within 30 minutes online, and funds can be transferred to the checking account in 7 days. This online procedure is only possible for loans up to $ 150,000; larger loans usually take 4 to 6 weeks. But it is a great way for a business with a good credit history to get a loan for small business development, if they previously refrained from such a decision, because the process seemed too long or complicated.
Fundbox opens a new era in factoring, which is often criticized for being quite expensive and complicated process. Typically, there are several problems with invoices:
Not enough money. For many invoices, sellers cannot receive 100% of their value in advance, as part of the advance is withheld until the buyer pays the invoice. This means that business owners cannot get all the money they need within weeks or months after making the upfront down payment.
The risk is imposed on to the borrower. Most old school invoices are regressive. They have the right to sell the invoice back to the seller if the customer does not pay the invoice. This puts borrowers in a difficult position if they have already spent the advance.
Many invoices require borrowers to transfer ownership of the invoices. This means that customers have to pay directly for it, instead of paying the seller, even if the latter does not receive an advance on the invoice. This can create tensions between small business owners and their customers.
Fundbox, also based in San Francisco, is innovative about invoicing. Fundbox pays 100% of the invoice value and they are non-recourse. Thus, the borrower will not have to worry in cases when his buyer has not paid. However, such funding from Fundbox may be unsecured because they claim to be able to minimize risk by having a sophisticated credit underwriting model that analyzes risks comprehensively, both at the business level and at the individual level of each invoice.
The annual interest rate on a loan from Fundbox ranges from 44% to 64%. Despite the fact that this is several times higher than standard bank lending terms, it is still less than the cost of services from traditional factoring companies (80% or more) providing financing to small businesses.
Commercial banks have become much more risk averse after the economic downturn, so much so that the share of loans to small businesses in the total loan portfolio of banks since 2008 has fallen by almost 20%. But a holy place is never empty for a long time. And to replace banks, the vacant niche is occupied by fintech startups. Companies like OnDeck have stepped up to fill the void and provide short-term loans (3 months to 2 years) to those who may be considered a risky lending option by banks due to their personal credit score and business timing.
OnDeck 500 requires minimum credit score, while banks generally would not consider lending to those with a credit score of less than 660. In addition, OnDeck only requires 1 year of doing business, while most banks, the dropout criterion is 2-3 years.
The reason OnDeck can afford to take on risky loans is because their online algorithm takes into account the information about the business that is available on the Internet (both financial information and social media). Online process of credit risk assessment and decision making, streamlined business process allows OnDeck to provide loans in a short time. In fact, the borrower can receive a positive decision on obtaining a loan on the same day when he applies for a loan, and the loan funds will appear in his account the very next business day.
Of course, the borrower will have to pay much higher interest on OnDeck loans than would be the case on traditional bank loans. But when every other door is closed, it can be a relief for business owners to finally find someone willing to lend them credit.
SmartBiz, Fundbox and OnDeck aren’t the only ones disrupting the traditional lending marketplace. These companies are part of a new galaxy of companies that are making unique solutions and using technology to make small business finance more widely and easily accessible.