Traditionally high risk, low dollar value small business loans are costly for lenders to originate and cumbersome for borrowers to apply for. Coupled with the lack of thriving secondary markets that fuel other lending segments such as commercial and retail mortgage, small business lending has remained a niche business for most financial institutions. Recently, a new origination channel for small business lending-the Internet-based small business loan aggregator-has emerged, offering small businesses more convenience in borrowing options, and offering small business lenders a new channel for loan acquisition. Internet-based small business loan brokers promise to transform the traditionally cumbersome and time-consuming method of applying for a loan into a simple, fast, and effective process. This TowerGroup Research Note analyzes the potential for direct and broker-related small business online loan origination.
Additional Information
Highlights
Due to the high risk and small dollar value per loan, US banks and other lenders to small businesses have not traditionally devoted much effort or financial resources to small business loan marketing and acquisition.
A new origination channel for small business lending—the Internet-based small business loan aggregator—has recently emerged, offering small businesses more convenience in borrowing options and offering small business lenders a new channel for loan acquisition.
Internet-based small business loan brokers have the potential to offer banks the same efficiencies of scale in loan acquisition that banks have achieved through automation of other loan processing functions, such as origination (credit scoring, analysis, and documentation), accounting and servicing, and portfolio and credit management.
TowerGroup believes that online loan brokers would appeal primarily to that segment of the small business market that is price-sensitive and interested only in acquiring simple, standardized loans rather than obtaining financial counseling, deposit services, or other service offerings that form the basis for a full service corporate banking relationship.
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