BI Intelligence, the research arm of new site Business Insider, has an excellent report on PayPal and Square's activities in the small business lending space.
Their report - The Small Business Lending Opportunity - requires a paid subscription. But they don't seem to mind if I publish a couple of their charts, especially if I mention how much I like their service (it's great) and how cheap it is ($495 a year).
The small business lending opportunity discussed in the report is due to a steep decline in bank lending to small businesses, especially businesses with less than $1 million in sales.
According to the report, this is due to "Financial institutions' stricter lending requirements". This, coupled with higher regulatory compliance costs, means small loans are not profitable enough for many banks to bother with.
In response, non-banks have moved into this space and are having a fair amount of success. The chart below shows the rapid growth in lending volume by PayPal and Square.
Non-banks, because they have less regulatory oversight and compliance requirements, are able to serve this market profitably.
Having said that, non-bank sources of money aren't always cheap. This is illustrated in the chart below which shows PayPal's merchant advances have a 25% effective interest rate.
Small businesses looking for loans, and especially merchant advances against sales, should look at the services provided by PayPal, Square and others.
Money is available, lending requirements less strict than with banks and the application process quick and easy. Just be aware of the costs.
Expect many more non-banks to enter the financial services industry in the coming years. The financial services is simply too big and too encumbered by regulations for this not to happen.
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