Why Millennials Will Change the Face of Small Business Lending
The media loves to talk about millennials. For those of us currently in our 20s and early 30s, that means they’re talking about us. Sometimes it’s in a good way. Other times, not so much. But, with every new generation that enters the workforce, this is what happens. We’ve just happened to enter at a time when the world is more connected than ever. Conversations are easier had than ever. The media, and our seniors, are just trying to figure out what makes us tick.
And what is the answer most popularly supplied (and most likely correct)? Technology. We are, without a doubt, shaped by the innovation that has been introduced to us from the time we were preteens, up into what is now our early years in the workforce. We grew up being a globe connected. Globalization was hitting the world when puberty was hitting us. The leaps we have seen in technology have been massive. More importantly, how it has altered our behavior, will forever change not only the way we work with the world, but how the world works with us. We are the “on-demand” generation. I can sit in my apartment and with the tap of a button order any meal I want (or even a chef to cook it), a car to take me wherever I’d like to go and booze to ensure I’m having a good time wherever I end up (disclaimer: booze not needed for a good time).
We’re used to having our questions answered in seconds by Google. Going to a library for research? Ha. That’s almost funny. We make our purchasing decisions by reading online reviews. We much rather search online for FAQs than pick up the phone and call customer service to answer a question.
As millennials continue to rise up in the workforce, taking on management positions (which many already have) or even starting their own companies (entrepreneurship is on the rise, after all), our on-demand nature will change the business world, just as it has the consumer world.
With majority of entrepreneurs needing financing at some point during the life of their business, where are millennial entrepreneurs going to turn?
I can tell you where it won’t be: the banks.
82% of small businesses are getting denied by the banks for loans, but many think this downward slide in small business lending is because of the recession and it’s headed on its way back up. But that’s just not the case. Bank lending to small businesses is to continuing to decline. After the recession, regulation tightened for these banks. Since they’re using our money to make loans, they need to decrease the risk in their portfolios, and small businesses are inherently riskier than larger businesses. On top of this, we have to keep in mind that banks are businesses, too. It costs them just as much to underwrite a $1 million loan as it does as it does a $10,000 loan, so it simply doesn’t make financial sense for them to keep making these smaller loans that small businesses request. (Most small businesses aren’t looking for enormous chunks of change.)
Beyond all this, I just don’t think any millennial entrepreneur is going to want to walk into their local bank, go through lengthy applications and wait months to hear if they’re approved. That’s just not how we do nor we will do business. When we want a loan, we want it now. Luckily, the void in bank lending has inspired a multitude of online lenders to emerge. These lenders initially sprung up to take over where the banks left off, but will stick around as they service the newest “one-click-wonder” generation. Whether looking for a personal or business loan, millennials are now able to find the money they need online within seconds. Here’s just a few ways that the online lending space serves the on-demand generation:
1. Faster Applications. Many of these online lenders require less information than banks to underwrite their loans. Therefore, it can take minutes to complete an application with some lenders. For millennials who are used to having most every other process streamlined, shorter applications are incredibly enticing.
2. More Approvals. Some millennials graduated at the start of the recession, leaving many without jobs. Those of us that did find jobs had starting pays that were nowhere close to that of our parents or older siblings. Needless to say, Gen Y is still catching up financially. However, many are burdened with large student loans, if not other debt. Therefore, we’ll spend many years continuing to build up credit and assets. These online lenders are approving around 60% of applications, giving more people a chance to secure funding. They can often make loans to people with less-than-stellar credit scores, by collateralizing the debt through such things as invoices or equipment. So, for those millennials still playing catchup with their credit, if they get bit by the entrepreneurial bug, an alternative loan might be their only option for funding.
3. Record Time to Funding. With “need-to-have-now” mentalities, millennials will be glad to learn that many online lenders can fund loans in a matter of days. (Fundera’s fastest time to funding is 5 hours.) Month-long wait times are no longer the only option.
The thing to keep in mind is that amongst all the great, Gen Y-pleasing attributes of online lending, one huge obstacle still remains: high rates. In order for these lenders to take on this risk, they do have to charge higher interest rates than you would find at a traditional bank. But, I believe that will change as well. As these lenders continue to build new technologies, their underwriting algorithms will become increasingly automated and robust, resulting in lower rates. When alternative lenders are able to compete with banks on rates, they’ll win. Within a decade, online lending will be the norm.
The on-demand generation is no longer just accepting the change that was given to us, we’re now forcing industries to change (business lending is just one example). Gen Y is often given a hard time. But what for? From the way I see it, we’re forcing change to happen at the most rapid pace our world has ever seen and that is something to be proud of.
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