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3 Things eBay's Move Into Lending Means for Entrepreneurs

3 Things eBay's Move Into Lending Means for Entrepreneurs

By    |   Friday, 27 July 2018 01:19 PM

eBay recently announced that it would offer small-business financing through Square Capital. The company plans to issue loans up to $100,000, which can be applied to things like payroll, new inventory, equipment financing and more. The loans are expected to go live in the third quarter of 2018, and they will be available to merchants that use the e-commerce site.

This move by eBay is part of an ongoing trend of fintech companies moving into the world of small-business lending. Amazon has been a small-business lender since 2016, and it has provided more than $1 billion in loans since launch. PayPal, another Silicon Valley titan, has offered working capital loans since 2014.

Small-business lending used to be dominated by traditional lenders, like banks and credit unions. However, these traditional lenders largely stopped most small-business lending after the 2008 financial crisis. That gap gave plenty of time and room for alternative lenders to move in. At first, new companies like Fundbox, Kabbage and OnDeck filled this void— and now tech giants like eBay and Amazon are stepping in. A 2017 report by McKinsey & Co. showed that 80% of SMBs "indicate that their research process for securing credit begins online." This is a space where tech disruptors have an advantage over traditional banks, which have been slow to transition online.

Here are some ways these new players can change the landscape.

1. Increased transparency

The small-business financing application process used to be a black box. Applicants would submit an application, wait several weeks and receive a loan offer usually peppered with fees. Now, alternative lenders have completely changed the standards. In an effort to compete with traditional lenders, they unpacked the entire process. Applications are denied or accepted within days instead of weeks, fees are comparatively more transparent and application requirements are clearly spelled out.

Amazon and eBay can continue to push for increased transparency. One major problem that remains is how interest rates and fees are listed. Some lenders use their own definitions of annual percentage rate (APR) that don't conform to standards, making it harder to comparison shop or fully understand the cost of a loan. If Amazon and eBay help pioneer that front, other lenders will have no choice but to follow in order to compete.

2. Market growth

Small-business lending has seen high levels of growth since the financial crisis. Small-business lending activity has proven to relatively align with the national GDP. As the economy improves, so does the industry. Fewer small businesses are defaulting, and more businesses are seeking more funding.

Alternative lenders have been able to take advantage of a previously unserviced market. Because of the stricter requirements traditional lenders place on loans, many small businesses were previously unable to obtain small-business loans when banks and credit unions were the only available lenders. Alternative lenders instead offer loans with eased requirements, although these usually come with higher rates and fees. As more lenders enter the space, the more tailored and specialized small-business loans become.

3. Rise in small-business crowdfunding

Gone are the days when lenders used to solely be banks and credit unions. Newer alternative lenders, like StreetShares or LendingClub, now leverage peer-to-peer financing. Also, borrowers will typically find that these lenders offer some of the most competitive rates as a result of the shared risk positions lenders now take.

Small-business owners will fill out their applications with the information they'd usually fill out on other applications, but they'll also add their business plans. Investors then decide how much they want to lend. Individuals can now invest with small businesses leveraging these peer-to-peer lenders and gain returns off of interest rates.

How to take advantage of these changes

Shop around: Application processing times have gone from taking weeks to now taking several hours. Some lenders offer funding within a business day or two from the point of application submission. Combine that with the fact that many lenders first perform a soft credit check, and you can quickly apply to multiple lenders within a single day without any negative effects on your credit score. Note that most lenders specialize in specific types of financing, and there is no one-size-fits-all solution.

Ask questions: Small-business lending has long been an area without much regulation and federal oversight. Some lenders have taken advantage of this by masking fees and making their rates seem lower than they actually are. Fortunately, there are lenders that clearly label their fees, are transparent, and make it easy to compare different loans side by side. Ask your lender questions about your rates, and if they seem to be dodgy or won't directly answer you, take your business elsewhere and be aware that you have options.

Joe Resendiz is a Research Analyst at ValuePenguin, where he focuses on personal finance and credit research to assist consumers. Previously, Joe specialized on public sector and infrastructure financing at Goldman Sachs. He graduated from the University of Texas at Austin with a BBA in Finance.

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3 Things eBay's Move Into Lending Means for Entrepreneurs
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Friday, 27 July 2018 01:19 PM
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