For a little more than a year, networks of small-business financiers have been gathering on the Internet, organized by vendors hoping to become the gateways between financial institutions and their small-business clients.

Small businesses submit loan applications to the networks, which distribute them to the participating lenders. When an application is approved, the lenders respond directly to the applicant with their terms. The small business can then pick the best deal among the approvals.

Networks that arrange financing between buyers and sellers work the same way — the buyer applies for a line of credit through a preferred list of network lenders, usually designated by the buyer.

Multiple-lender networks increase the chances for approval of a loan application. Lenders benefit by getting access to more applications, industry observers say.

Vendors and industry analysts say half a dozen networks operate under or are moving toward that model. The vendors predict that banks joining these networks will get significant Internet loan volume, assured by the multitude of access points. Vendors can link their networks not only to their own or the banks’ Web sites but also to other sites that small businesses frequent.

Most of these networks do not charge fees for membership, though banks pay a fee for each loan closed through the network, starting at about 100 basis points and varying according to the amount of the deal and the type of financing.

“You generally pay a network fee for the loans you book, so there is still a cost to it,” said Bob Kottler, executive vice president of retail and small-business banking at Hibernia Bank in New Orleans, which joined LiveCapital.com’s network in October. “Effectively, you replace your marketing cost with a fee to the networks.”

Mike Grossman, founder and chief executive officer of LiveCapital, a San Mateo, Calif., online network vendor, said that only large financial institutions can scale down their customer acquisition costs to an amount equivalent to the fee vendors charge. These fees, in most cases, he said, are significantly lower than what banks would pay in marketing costs.

Another advantage of the networks is that financial institutions don’t have to “pay in advance and hope someone is going to come,” Mr. Grossman said. “You pay for performance.”

LiveCapital’s 15-month-old network — the first of its kind, analysts say — offers loans and financing and features 65 lenders, including Citibank, Wells Fargo, American Express, and First Union.

The strategy for vendors is to include a cross-section of lenders in their network, to increase the frequency and quality of approvals. Vendors say they look for lenders with risk focus and a variety of geographic coverage and product offerings.

To improve the efficiency of the process, lenders can presort the kinds of applications they want to receive by such categories as years in business, type of industry, and credit scores.

“We match the need to a lender because every lender has a ‘sweet spot’ in terms of product and risk base,” said Jim Fox, co-founder and chief executive officer of EqualFooting.com, a Sterling, Va., lending network that was started in April.

Seventy percent of the applications that pass through EqualFooting’s 15-lender network are prescreened for lending criteria before being sent to the lenders, Mr. Fox said. Customers can use the network to buy any of 350,000 items, from office supplies to heavy machinery, and to apply for loans or lines of credit.

“We can use the financial initial screening criteria to ensure” that the lenders “only see applications that are within their target areas by their lending criteria,” he said. “So they don’t waste time processing applications, each lender gives rules on types of loans they want to see and can filter out loans they don’t want.”

Venkat Srinivasan, founder and chief executive of ECredit.com, a Dedham, Mass., company that offers financing through a network of more than 25 lenders, said his participating banks “are getting to pick and choose” the applications they view. “Today they don’t have that ability to pick and choose. They either accept or reject.”

The networks help banks see a wider variety of applications, Mr. Srinivasan said. “Every financial institution has a specialized product, and they can reach a much broader audience through the network.”

Lenders also can recycle their rejected loan applications through a network to help a client locate alternative financing. Thus, the lender can generate a fee with little or no legwork and is spared a sour relationship with the rejected applicant who may later want to buy other products from the lender.

“Getting a new revenue stream is always useful,” said David Fingerman, a senior vice president and director of e-business, small-business services at FleetBoston Financial Corp., which participates in a 60-lender network created in April by PrimeStreet Corp. of Boston.

There is a catch, however. “You’re introducing a third party into a transaction” that is normally conducted directly between a financial institution and its customer, he said. “There are important strategic and financial issues that need to be considered,” such as what information should be shared with a potential competitor.

Vendors say the advantage of automation is that approvals can be given in “real time,” — small businesses sometimes get approvals in a matter of seconds — which helps banks retain customers accustomed to instant information.

“You will lose the customer if you can’t respond in real time,” Mr. Srinivasan said.

But even with all of the supposed benefits, the jury is still out on how long it will take the networks to catch on with small-business borrowers.

Mr. Fingerman said FleetBoston’s participation in PrimeStreet’s network has produced unspectacular results so far.

“The general consensus is, the network is not driving the type of volume that would significantly enhance our overall lending program at this stage,” he said. “It only pays off if you can generate enough incremental volume to make up for closing fees you pay to the network, and generally the volume has not reached a level that is making a serious dent into our overall production.”

Three issues are “thwarting” the network so far, Mr. Fingerman said: lack of brand recognition, security issues, and lack of face-to-face interaction.

David Kresge, a senior vice president and chief of information strategy at PrimeStreet, said that adoption has been slower than expected in the industry in general but that options are available to draw more borrowers.

To make the network more user-friendly, PrimeStreet plans to install a 24-hour telephone help line, e-mail correspondence, and interactive chat to assist borrowers before they submit applications.

“Customers often have questions and are more comfortable talking to a person,” Mr. Kresge said. “Small-business owners coming to the Internet sometimes simply don’t know what type of loan is most appropriate, along with other factors like whether they should put up collateral.”

Banks have been too passive, sitting back and waiting to see what will happen rather than actively courting small businesses to use the Internet, Mr. Kresge said.

Banks “could be moving more aggressively,” he said. “Banks are waiting to see what will be successful. They could be being more experimental with more creative terms on loans and working more closely with applicants to try to see what works and what doesn’t work.”

Bonnie Wikert, vice president of e-commerce and business development at PNC Financial Services Group Inc., said the Pittsburgh banking company has had positive results since it joined LiveCapital’s network in February.

Application volume “has been doing as well as expected,” Ms. Wikert said. “It’s a relatively young relationship. It’s a more efficient way for small-business customers to obtain capital and run their businesses.”

Other network members are similarly positive.

Mr. Kottler said online networks are becoming “a bigger part” of how Hibernia does business. “More people starting small businesses today are younger,” he said, “and in general small-business owners today are more comfortable using that online channel. They are going to be willing to go to those sites and see what happens.”

Christy Schmitt, the small-business segment manager for Union Bank of California in San Francisco, which joined the LiveCapital network in November 1999, said that though the network channel “isn’t a hot market right now, in five years it’s going to be a real contender to our traditional delivery channels.”

Union Bank will monitor the network’s volume during the next year and then decide whether to stay in it, she said. Though it may cost the bank money in the short term, Ms. Schmitt said, she believes being part of an online network will let the bank evolve.

“We are preparing for future volume that may not be there right now,” she said. “If we are not prepared for the future, when it becomes a real hot delivery channel, we won’t be ready.”

FleetBoston’s Mr. Fingerman said he expects the networks will become a significant component of small-business financing in the next decade.

“It’s early in the game, and one of the problems is that vendors made grandiose predictions about the huge numbers of loans that would be flowing through the networks days after they opened their doors, and that has not materialized,” he said. “In a sense it’s been over-hyped. It’s coming, but it’ll have a much longer lead time before we see significant numbers flowing through the networks.

“The reality is, none of us knows exactly when it’ll take off, so it’s important we keep our fingers on the pulse of the Internet and technology marketplace, so if adoption does rise rapidly, we are poised to take advantage of it.”

A major factor that made online approvals possible was the widespread incorporation of credit scoring in the approval process about seven years ago. Before that, industry observers and analysts say, approvals were made on the basis of time-consuming and unstandardized reviews by individual loan officers.

When banks began accepting credit scoring’s statistical models, it standardized the process, paving the way for instant approvals on the Internet.

The need for online financing for small businesses was not especially obvious when Mr. Grossman started LiveCapital, one of the first in the online financing network arena, four years ago.

“The business was totally different four years ago,” he said. “It was a one-stop shop for small businesses to get various products and services with a particular focus on financial services.”

Mr. Grossman found that 46% of the visitors to his company’s Web site went to one area of it, small-business financing and loans. The next most popular category, health insurance, only got 9%. “It became to clear to us that, within the small-business market, financing was the critical need,” he said.

ECredit.com’s Mr. Srinivasan said banks were hesitant at first to participate in networks. “There was a psychological effect early on. Banks looked at us as a competitor, but we are really not. They thought we were going to stand between them and their customers, but it doesn’t work that way. We are strictly an infrastructure provider.”

Though some vendors have persuaded financial institutions to join their networks, the vendors say the final objective is to take the online process beyond approvals to payments. “That’s the ultimate goal,” Hibernia’s Mr. Kottler said, “that someone would apply online, get approved online, and actually get fulfilled online.”

Mr. Fingerman said end-to-end automation would make the networks more appealing to online customers, who could get financing approval and credit in real time, then begin shopping immediately.

Estimates vary for when real-time online payments will become available.

Mr. Srinivasan said online payments are “on the drawing board” and may be available “sometime next year.” Mr. Fingerman and Mr. Grossman predicted it would take two to three years before major lenders begin offering such payments.

Mr. Grossman said authentication is the biggest barrier to real-time liquidity, which he called the “Holy Grail” of the industry.

“There are various fraud devices where you can check fraud,” he said. “The challenge is integrating all of them in on a real-time basis. There are offline pieces that support the online experience. Over time that will all be made in real-time online, but there are many pieces that need to be integrated in.”

EqualFooting.com’s Mr. Fox said another hurdle facing online payments is that each financial institution maintains its own back-office process so that the network payment platform would have to be flexible enough to support both the lenders’ internal needs and automation of the process between institutions.

Mr. Kottler said he expects businesses to take advantage of the new federal digital signature law to make online payments available within two years. “Initially it will be modest and over time will continue to grow.”

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