Fundera Report: The Traditional SME Lending Process Pretty Much Sucks

Fundera, an online lending comparison site, has partnered with Oliver Wyman on a report about SME lending. Entitled, “Great Expectations: Improving the loan application process for small business borrowers, the document effectively labels the traditional borrowing process as broken.

Their research concludes that banks generally lag behind Fintech lenders. The borrowing experience pretty much sucks as the process is lengthy, confusing and not sufficiently digitized as banks are mired in the analog past. On the flip side, banks still have an advantage in a lower cost of capital so if you can suffer through the frustration you loan (if ever approved) may come at a lower cost.

Small business represents about half of the GDP in the US so the opportunity to service the financing needs of SMES is profound. While banks still dominate SME lending, the Fintechs have gained a foothold in a far friendlier and speedier process. Banks beware.

So what is the big takeaway from all of this?

The report explains that alternative lenders have a higher cost of capital because they lack access to low cost deposits that banks and credit unions use to fund their loans. The average cost of funds for a bank is around 0.06%. In comparison, OnDeck reported a cost of funds in Q1 2017 of 5.9%.

If the online lenders can gain access to less expensive funding before banks can drag themselves into the 21st century the Fintechs stand a good chance of lapping traditional finance. Some online lenders, notably Renaud Laplanche of Upgrade, believe this is happening now.

The report is available for download here.


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