Small Businesses More Understanding, Looking for LOCs

“The ISO channel is an important part of our business and we remain committed to it,” said Jay Shaw, Head of Sales at Enova SMB. Enova, which operates OnDeck and Headway Capital, is one of the largest small business lenders in the United States. The company has originated more than $2.2B in loans in the first three quarters of this year, a lot of which comes through “highly compliant ISOs.” The relationship works, especially in times like these when banks are reducing their exposure to small business lending.

But officially we’re not in a recession. The S&P 500 is up 20% YTD, for example, unemployment is low, and inflation has backed off from its previous peak. Shaw says that a positive sentiment among small businesses is something they’re seeing along with this, that when they actually talk to small business owners one-on-one, many of them are feeling pretty good right now.

While most observers would point out that elevated interest rates have shaken up the game, there’s actually been a silver lining to how it’s played out.

“There’s a lot more education and understanding of cost of capital,” said Shaw.

Business owners, for example, who were used to a perpetual low interest rate environment, have watched banks dramatically increase interest rates over the last year or so and it’s actually brought attention and awareness to the fact that lenders have a cost of a capital to contend with as well, that rates come from somewhere. It’s made them more understanding, according to Shaw, when they’re presented with terms now from online lenders. That understanding is compounded by a greater openness to doing it all online in the first place, which businesses are now more accustomed with after having to do so much online during the covid years. In essence it’s a strong environment to be working in right now. Still, many businesses are coming in with a certain expectation of how online lending should work especially if they worked with a bank previously.

“More and more businesses are looking for a line of credit product,” Shaw said, which Enova offers in addition to term loans. Businesses tend to appreciate this product not only because of the control it gives them but also because “they have continuous access to capital after every payment they’ve made,” Shaw said.

According to the Intuit Small Business Index Annual Report, 22% of small businesses applied for a loan or line of credit last year. Although this didn’t distinguish term loans from lines of credit, the demand for a revolving product is evident by an even more sought after type of financing, credit cards, which 30% of small business owners applied for. MCAs, by comparison, were a distant fifth, with only 6% of businesses applying for one.

Perhaps an all important measure is not only what businesses want but how they’re using it in the end.

“A lot of [our customer’s] borrowing is growth borrowing with a significant ROI,” Shaw said.

Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.