written by Blair Groves
When asked who your biggest competitor is, you probably think of other community banks or larger regional banks in your area. But a new competitor is starting to gain traction within the realm of business lending that most community banks aren’t even aware of yet. There is now an alternative lending option for borrowers known as cloud funding.
Most cloud funding lenders focus on making small business loans under $100,000. They market quick and easy online application, fast approval and funding, and no hassle. These are true small business loans and lines of credit, not just cash advances, with loan terms typically up to 24 months. Two of the largest cloud lenders in the arena are OnDeck and Kabbage.
Cloud lenders don’t use traditional bank underwriting practices or require financial statements. They have developed proprietary credit scoring models that enable them to make fast credit decisions based on minimal financial information. In some cases, the application process takes only 10 minutes. Cloud lenders, such as OnDeck, promises a loan decision in a matter of minutes and funding in as little as one business day.
This fast and easy application and funding process does not come without a downfall. The rates on cloud loans are generally higher than the rates on typical bank loans. For small business owners in need of quick injections of capital or easy access to a line of credit, it is becoming an increasingly attractive trade-off.
How to compete
If the rapid rise of cloud funding in just a few short years is any indication of what’s to come, now is the time to start planning how your bank will compete. Start by marketing what added value you can provide to them that cloud lenders cannot. Community banks have traditionally used this strategy to compete against large banks, but the same strategy can be implemented to compete with cloud lenders.
Your lenders can work to be trusted advisors to their small business borrowers by:
- Using the financial information of your borrowers to show them how they can increase efficiency and profit margins.
- Providing guidance to aid borrowers in determining the best type of loan to suit their needs.
- Offering additional products and services to help borrowers with business needs, such as treasury management, wealth management and merchant processing services.
Increased competition for banks in the form of alternative lenders is not a new thing, and it will continue to be a challenge. By being a full relationship lender and adding value to your small business borrower’s operations, you can earn their loyalty and minimize the temptation to use cloud based lenders.