Bankers are warming up to a program that aims to improve the credit profile of entrepreneurs while giving banks a new way to compete with online lenders.
SmartLoan, an effort by the New York nonprofit lender Excelsior Growth Fund, provides low-cost loans to borrowers that are referred by participating banks. Excelsior helps borrowers improve their credit profiles before offering the referring bank a chance to buy the loan at par.
Flushing, for its part, is optimistic that the program can make loans more affordable for borrowers who otherwise might take on more debt than they can repay, said John Buran, the Uniondale, N.Y., company's chief executive.
"We look out and see a lot of these fintech companies providing a quick turnaround on small-business lending – and at sometimes very high rates," Buran said.
Excelsior, meanwhile, noticed that aspiring entrepreneurs from low-income neighborhoods were visiting its office in droves, seeking to refinance heavy debt loads. Many borrowers had taken out loans from multiple marketplace lenders.
"We kept seeing borrowers that had gone online to borrow, and as a result were severely impairing their balance sheet," said Pat MacKrell, chief executive at Excelsior and the bank-backed New York Business Development Corp. The increase in refinancing requests was "dramatic," he added.
SmartLoan looks to provide quick turnarounds – approvals within 24 hours and funding in five days – at a lower cost for borrowers, MacKrell said. Borrowers are not penalized for prepayment.
Approved borrowers can qualify for loans of up to $100,000 with a maximum 13% interest rate. In comparison, small-business loans from lenders such as OnDeck can carry interest rates of over 40% on an annual basis.
"We lend online, essentially, to get [borrowers] offline," MacKrell said.
Interest in programs such as SmartLoan is rising as firms like Kabbage, OnDeck and CAN Capital grow rapidly by offering fast-decision small-business loans online.
In January the $6.6 billion-asset Opus Bank in Irvine, Calif., agreed to refer small-business clients to OnDeck, while the $1 billion-asset Live Oak Bancshares in Wilmington, N.C., has built its own online platform.
At the same time, signs of trouble have begun to emerge for marketplace lenders in terms of customer satisfaction.
Just 15% of small businesses approved for a loan by an online lender report feeling satisfied, compared with 75% of borrowers who worked with small banks, based on a recent survey by seven regional Federal Reserve banks. The survey found that the most common reasons for dissatisfaction were high rates and unfavorable repayment terms.
The survey's findings echoed another recent Fed report that showed widespread confusion among borrowers with the terms of loans offered by marketplace lenders.
Excelsior, for its part, works with small businesses to improve their cash flow and business plan. The average SmartLoan borrower has a 640 credit score.
"The idea is that the borrower spends time in the farm team" before it is ready to work with a bank, MacKrell said.
Flushing, which hasn't set referral goals for the SmartLoan program, initially wants to focus on understanding demand for the product in hopes of getting more small businesses "back in the fold," Buran said.