Originally Published in Bloomberg Businessweek. Written by Nick Leiber , Small Business editor for Businessweek.com
The middlemen aren’t lenders and don’t act like traditional loan brokers, who tend to specialize in a single industry. Instead, the sites analyze would-be borrowers’ financial data to assess risk, then funnel their assessments to banks, credit unions, and alternative lenders. The amounts requested generally range from a few thousand dollars to a few million. While the firms make no guarantees a deal will close, they trumpet approval rates of 70 percent to 80 percent, along with the ability to slash the time it takes to process a bank loan from months to weeks. Executives at the four sites say they expect to complete a total of more than $1.5 billion in lending this year, double the amount they handled in 2011.
The middlemen are “playing into a real weakness” among banks, says Sharon Chinn, a practice manager at advisory firm Corporate Executive Board. Prior to the housing bust, many small business owners used their homes as piggy banks to fund operations. So “a lot of banks haven’t, for a very long time, needed to invest in support and advice infrastructure for small businesses,” says Chinn. That may explain why lending to small businesses has been contracting for four years straight, while lending to large companies began showing signs of recovery in 2011, according to data from the Federal Deposit Insurance Corp.
While business models vary slightly from outfit to outfit, most middlemen make their money by charging borrowers and lenders fees for using their site, as well as for extras, such as polishing a loan application. Biz2Credit typically takes a fee equal to 1 percent to 4 percent of the loan from the lender. New York-based BoeFly’s co-founder, David Nayor, says “the problem with taking commissions on deals is that it drives up [the lender’s] cost of origination.” Instead, his company charges borrowers a fee starting at $149 per loan request. Lenders can access full documentation to three deals for free; after that, they pay $55 a month. At CNF Exchange, based near Tampa, borrowers must pay $99 before they can contact interested lenders. Salt Lake City-based Lendio sells leads from $40 to $300 per referral to its nearly 200 lending institutions, according to co-founder and CEO Brock Blake.
The bottom line: Four sites acting as go-betweens will unlock more than $1.5 billion in lending for small businesses this year.
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