How many options do business loan brokers have for business line of credit lenders?
For non-bank direct lenders catering to small-medium businesses, there are about 10 or less. And those that do have broker referral programs are not easily accessible. This needs to change.
There are certainly reasons why lenders have chosen not to offer this product or why existing lenders are very picky with their origination channels. Many of those reasons may be valid however there is an opportunity for more lenders to offer business lines of credit WITH a broker referral program because it is being done successfully by other lenders. Let's dive in.
First, What is a Business Line of Credit
A business line of credit (BLOC) is a financing product designed for businesses. It functions similarly to a credit card, with a revolving credit line and an interest rate. Here's a breakdown:
Line of Credit: A BLOC grants access to a pre-approved amount of money. Unlike a loan where you receive a lump sum, a BLOC functions like a revolving credit line.
Flexibility: You can withdraw funds as needed, up to the approved limit. Only the amount you borrow accrues interest.
Repayment: As you repay what you've borrowed, the available credit in your line replenishes, allowing you to withdraw again if needed.
Amounts: For non-bank lenders catering to small businesses, the maximum line of credit is in the range of $250,000 but at least one of the following lenders has their maximum at $750,000.
What are the current options?
Direct Lenders include American Express, Ampla, Backd Business Funding, Bluevine, Fundbox, Headway Capital, OnDeck, Idea Financial, and just recently Intuit Quickbooks came out with a BLOC.
A few that offer the product but we have not confirmed are direct lenders are Fundible, Kapitus, and SBG Funding. Then there might be a few others out there that we are not aware of.
According to the Consumer Financial Protection Bureau, “The total estimated value of the small business lending market is $1.4 trillion.”
Barriers to Entry
Licensing and Regulatory Requirements
Obtain appropriate licenses and regulatory approvals from state and federal authorities
Capital Requirements
Having sufficient capital reserves to fund the credit lines extended to borrowers. This upfront capital requirement can be a major financial barrier especially if the Cost of Capital is not low enough to where the product offering could net a profit.
Risk Assessment and Underwriting Capabilities
Lenders need robust underwriting processes to assess the creditworthiness of business applicants and manage the risk of defaults.
Competition from Incumbents
Overcoming brand recognition and customer loyalty to these incumbents can make it difficult for new lenders to acquire market share, at least initially.
How lenders get the product set up
Many of the lenders listed do have a partnership with a bank to legally offer the product. Some of the partner banks include WebBank, Celtic Bank, and First Electronic Bank. The lenders will list these banks on their website providing a disclosure that mentions they are not a bank, but merely a ’fintech’. For example, Bluevine says on its site,” Bluevine is a financial technology company, not a bank. The Bluevine Line of Credit is issued by Celtic Bank.”
What is a broker referral program?
A referral program is a partner channel where the lender forms agreements with referral partner companies that will send them packaged deals for approval. In return, the partner or broker earns a commission for each deal that is successfully closed. These programs will differ from lender to lender.
Why lenders are strict with who they partner with
Some lenders might hesitate due to concerns about managing broker relationships, potential fraud, or decreased profit margins. However, by implementing clear guidelines, robust risk assessment processes, and efficient onboarding procedures, these concerns can be effectively mitigated.
Performance metrics are used to evaluate how well the referral partner is doing. These can be more strict for line of credit lenders given the product is generally for a higher quality of business owner than some other products. However, they should be reasonable enough that a broker can sustain a relationship with even a small amount of quality submissions but to each their own.
Why more direct lenders need to roll out this product
More lenders need to roll out business lines of credit with broker partner channels because too few have accessible partner programs. This includes some of the previously mentioned lenders and maybe a few we aren't aware of who are direct lenders and not brokers themselves. Which leads to my next point.
Because of the lack of options, brokers have to partner with other brokers who are signed up with certain lenders to get access to the business line of credit. That means there is a commission split between the two brokers which affects the originating broker's bottom line. It also means there is more potential for other issues like losing the client to the other broker, the client not getting the best product for their situation, miscommunication, delays, and more.
What needs to change
The business lending industry needs to address this gap by encouraging more lenders to offer BLOCs with broker referral programs. This would provide brokers with the tools they need to serve their clients better and benefit lenders by expanding their reach and increasing their customer's lifetime value. It is a win-win-win opportunity for brokers, lenders, and business owners.