The Future of Small Business Finance?

Recently, I had the fortunate opportunity to talk with a young entrepreneur who started an alternative lending company in a South East Asian country.  As a Harvard graduate in economics, he was initially recruited by Germany’s Deutsche Bundesbank and was soon scouted to McKinsey & Company, one of the best global consulting companies.  For the next two and a half years, he worked on various financial consulting projects with executive management at top 20 financial companies.  One thing he noticed was that all these mega institutions felt “a paradigm shift in finance”.

These global corporations all shared similar sentiments for this shift, which was largely due to two major reasons.  First, after the 2008 global financial crisis, regulations on banks and financial institutions greatly strengthened. As a result, the return on equity (ROE) of major banks sharply dropped from 12% to 2-3%.  Second, as Information Technology (IT) services developed and integrated with various outlets of finance (PayPal, for one), much of the traditional banking services have begun to move to non-banking companies.

After a period of observing these changes first hand, he decided to forgo the 6 figure salary and stability of his consulting job and joined a team of young entrepreneurs to start an online alternative personal and business loan company.  For decades, perhaps centuries, large banks and financial institutions produced loan and investment products that was sort of “mass produced”.  Unfortunately, they missed a large segment of customers- those who did not meet set credit standards, business histories, or those looking for more flexible terms. Nobody is questioning the fact that banks provide the best rates and terms on small business loans. The issue is, you cannot compare rates and terms on loans you aren't able to obtain in the first place. There is a huge gap in the marketplace, only about 1 in 5 small businesses that apply for a loan from a big bank are approved. As Bob Hope said, "a bank is a place that will lend you money if you can prove that you don't need it." Fact remains, most small business owners do not fit bank mandated criteria for one reason or another, so going the bank route is simply not an option, or even realistic for a myriad of reasons. 

In this sense, the new era of finance is opening up:  an individualized, efficient, and broader loan logistics through the Internet.  Small business owners and individuals should take full advantage of this trend, and find opportunities to fuel their future success and business growth through reliable online loan companies.