When we started Fundera, we wanted to bring more transparency and accountability to the small business lending industry. Our unbiased marketplace was the first step. Our “Know Before You Owe” campaign was the second.
We’ve taken even bigger strides since, like leading an industry-wide coalition to launch a Small Business Borrower’s Bill of Rights. But there’s still so much more to be done.
We’re taking our next step with the launch of the State of Online Small Business Lending, a quarterly report aimed to bring more transparency to the space. It covers all the trends we’ve seen in eligibility requirements, loan product offerings, and rate expectations. This report is for small business owners, by small business owners.
We’re upfront about where we got our numbers, how we crunched them, and what it all means for you. You can use the index to see where you and your business stand, and to better understand what you should expect.
The path to a fair lending industry begins with access to data. Let’s get started.
Fundera was built with one goal in mind: to help small business owners better understand their credit options by helping them navigate the complex world of online lending. Fundera wants them to make smart financing decisions and, in the end, find the best loan available to their business. But this can only happen if they have access to information on what options are truly available to them. In other words, they need total transparency.
Small business owners want to know where they fit into this new world of online lending. Their five main concerns are:
There are dozens of small business reports produced monthly, but none of them answer these critical questions. By releasing anonymous customer loan data, Fundera is making an effort to address these questions. This initial report, which will be updated quarterly, is focused on trends in online lending eligibility. The transparent data in this report complements advances made through creation of the Small Business Borrowers’ Bill of Rights.
Two specific qualifiers enable Fundera’s marketplace data to provide a uniquely comprehensive look into the state of online small business lending. They include:
For an overview of the loan products offered on Fundera, visit the Business Loans page. This page includes a visualization of the general qualifications required to be eligible for various types of loans, as follows:
To better understand the dataset, below is Fundera’s credit product distribution by dollar volume funded.
This report contains additional information on four types of loan products: short-term loans (with a duration of 3-18 months), medium-term loans (1-5 years), lines of credit, and SBA loans. These loan types, in keeping with general activity in the online lending market, make up most of the loans funded through the Fundera platform. Future Fundera reports will include other loan products, such as invoice financing and equipment loans.
There are three key eligibility-related findings that Fundera has observed:
The chart below provides the interquartile ranges for credit score, annual revenue, and APR for each loan product. To clarify, an interquartile range is the range of values between the 25th and 75th percentiles. It’s a reasonable “average” range (middle 50% of values) that deletes the extreme values on either end. This means that business owners with lower or higher credit scores or annual revenues may still be eligible for a funding option, but being in the target range increases the probability of getting a loan. The chart below reveals, based on credit score revenue, what loan products a small business owner is most likely to be eligible for, as well as the approximate APR they should expect to pay.
SBA loans offer the lowest APRs but require the highest credit scores. Interestingly, the revenue range required for an SBA loan is significantly lower than those required for medium-term loans or lines of credit.
Medium-term loans offer a meaningful alternative to SBA loans. In return for APRs that are higher than those for SBA loans but significantly lower than those for short-term loans, medium-term loans have a faster application process and lower credit score requirements. However, medium-term loans currently have the highest revenue requirements.
Short-term loans bear high APRs, but for borrowers with lower credit scores and revenues, they may be the only option. However, due to Fundera’s marketplace approach, borrowers report effective APRs that are 15% below available industry averages. In fact, the median factor rate for short-term loans funded on Fundera’s platform was 1.18. (Business owners multiply their cash advance amount by a factor rate to determine their payback.)
Lines of Credit
Lines of credit have very similar requirements to medium-term loans, except for lower credit score thresholds. However, the median APR for lines of credit is almost twice the median APR for medium-term loans. This is where the aforementioned lender-by-lender differences come into play. Two of Fundera’s four lenders in this category have a median APR of around 20%, which is very similar to that of medium-term loans. The other two lenders in this category have a median APR of around 38%, increasing the overall median for the product category. The affordability of the line of credit product varies, and Fundera’s offerings will continue to vary, considerably by lender.
As mentioned, APR is the best way to compare the costs of different loan products. However, every lender has their own underwriting processes, so it is difficult to identify all of the factors—and how they’re weighted—when determining the APR for a loan. That said, Fundera’s data clearly shows that a borrower’s personal credit score will be the single most influential part of their business loan application. It singlehandedly affects eligibility and APR more than anything else. And, unsurprisingly, the higher the credit score, the lower the APR.
Again, this is not to say that a small business with strong revenue and profitability would not be able to find relatively low APR just because of a below average credit score. The correlation is not predictive but does confirm that credit score remains an important part of how online lenders underwrite.
Statistical Note: The R2 value suggests that 97.1% of the variation in the median APR can be explained by the average credit score. This does not imply causation, but confirms that there is a very strong correlation between the two variables.
There’s a clear relationship between loan amount and time to funding: the longer the time to funding, the higher the loan amount. This means that if a small business owner can spend extra time to provide additional information and documentation and wait longer for approval, they’re more likely to qualify for larger loan amounts. Of course, many other factors come into play here, but it’s a useful point to consider: attempting to find capital within a short time period will often limit the loan amount a small business can qualify for.
Statistical Note: The R2 value suggests that 75.1% of the variation in the median loan amount funded can be explained by the median time to funding. This does not imply causation, but confirms that there is a very strong correlation between the two variables.
For Fundera’s future quarterly reports, small business owners can expect:
If you have questions or feedback about The State of Online Small Business Lending, please email email@example.com.
Access the PDF version of this report here.