When JP Morgan announced it would begin offering loans to its small business clients via a partnership with a fintech startup, the market took notice. Instead of building its own online lending offering, the biggest US bank chose to partner with OnDeck, whose stock price spiked almost 30% upon the announcement. Those following what's happening in online lending have witnessed billions of dollars of debt and equity that's poured into the space over the past couple of years. In the wake of the financial crisis of 2008, banks have tightened lending criteria and that's provided an opportunity for technology and service startups to step in. In the aggregate, though these firms have enabled billions of dollars of lending to small businesses over the past few years, they're merely a speck on the entire map of lending, paling in comparison to their offline competitors. These startups have generally taken 2 different approaches:
- marketplace lending: Popularized in the consumer space, companies like Lending Club have created vast marketplaces of lenders and borrowers. While Lending Club has entered into the SMB lending space, there are other pureplays like Lending Circle that have made SMB lending their bread and butter.
- balance sheet lenders: these companies aren't acting as brokers but actually underwrite their own loans to SMB borrowers. It gets a little more complicated as institutional lenders like Victory Park provide lending facilities to these online lenders. Whether they're lending out their own equity or someone else's cash, balance sheet lenders are assuming the underwriting risk.
- pureplay startups that are taking incumbent banks head on competitively
- companies that provide enabling technology to the existing banking infrastructure to work with banks to develop their own online lending offerings