A blogger with alternative small business lending company Kabbage recently pitched me to write a post featuring her company. I’d heard of Kabbage before and had it in my “future topics” list, so I figured this was the nudge I needed to start poking around.
As it turns out, Kabbage doesn’t need my help to build top of mind awareness or attract traffic to its website. It’s already gotten a big write-up in Forbes, which reported that Kabbage is an established leader in the emerging space and well on its way to a record year. Bank lending to small businesses froze during the Great Recession and hasn’t recovered, especially for amounts in the $25,000 to $55,000 range — the sweet spot for this new breed of alternative lenders. Also, alternative small business lenders decide on applications within minutes, not weeks (like traditional banks). Not surprisingly, the field is quickly crowding with competitors like OnDeck, Prosper, CAN Capital and spinoffs from companies like Amazon, PayPal and Square.
As Competition Grows, Will Scrutiny Also ?
A few things in the Forbes article struck me as potential problems/opportunities for law firms — depending on whether you’re a plaintiff’s or civil defense attorney. Although alternative small business loans are easier to obtain than small business loans from banks, they come at a steep price. On an annualized basis, the interest rate on alternative small business loans ranges from 40% to 60%.
“Some of these guys make used-car salesmen look good,” says [Jay Goltz, an entrepreneur and small-business advocate in Chicago], who calculated that one lender was charging as much as 150%. “I don’t know how any business could grow fast enough to pay off that kind of loan.”
As the Forbes article points out, “with all of that credit available, many businesses have gotten in over their heads because they didn’t realize the full price they were agreeing to pay. The fact that the loans are for short terms can disguise how expensive they are.
As competition grows in the alternative small business lending industry, it will be interesting to see what tactics competitors use to build and hold market share — like high-pressure sales, looser lending standards, derivative markets — and whether state and federal regulators decide to intervene to prevent another credit bubble from forming.