Who’s Lending Anyway?

Young woman is looking through a binocularsIn commemoration of Payments Law’s one year anniversary, I’ve taken a slight departure in this post by quickly summarizing how people come up with the capital to jumpstart their companies.

Where do most (non-tech) entrepreneurs go?

Mostly likely, NOT banks:  According to the Wall Street Journal–“The number of loans for $1 million or less held by banks is down about 14% to 23.5 million since 2008. In nearly one-third of all U.S. counties, small-business lending remains below 2005 levels, estimates PayNet Inc., a Skokie, Ill., tracker of loans by banks, corporations and alternative lenders such as finance companies….Some analysts are encouraged by recent signs of a lending uptick by small banks, which often focus on small businesses. In July, the total amount of commercial and industrial loans held by small U.S. banks rose 11% from a year earlier, according to Moody’s Analytics.”

Those numbers are still very low.

Not surprisingly, “alternative” financing sources have met great success as SMBs clearly needed other sources to obtain capital.  Here’s a short list of various alternative lenders:


P2P: Prosper, Lending Club

Crowdfunding:  KickStarter

Online Payments Companies: Kabbage, PayPal Working Capital

CDFI: Opportunity Fund (only in CA) but there are CDFIs throughout the country

It’s true that the regulations that these alternative lenders may differ from traditional lenders, and may be providing loans at less competitive rates than traditional lenders.  But it seems, the tide is turning and many entrepreneurs are looking first to these non-traditional lenders.  Which begs the question: who is taking the the real long term risk: banks or borrowers?