The Rise of Online Business Loans
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UPDATED: Oct 5, 2012
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Thanks to the ongoing credit crunch it has been difficult for businesses to get commercial loans. Most banks, still gun shy from the subprime lending crisis, are none too eager to dole out money to small and new businesses. Fortunately for entrepreneurs, innovative online business loan lenders are rapidly rising to fill the void.
One giant moving to fill this void is Amazon. Amazon has launched a program called Amazon Lending that offers business loans to sellers that offer their products on the company’s massive marketplace website. Although Amazon is facing more credit risk by becoming a lender, it is also helping its online merchants in purchasing more inventory to sell on Amazon.com.
Amazon Lending offers merchants up to $800,000. Like all business loans though, this money carries interest. Merchants are charged interest rates ranging from 1 to 13 percent, far cheaper than most credit cards.
Hoping to accelerate the lending process—particularly compared to the slothful pace of banks—Amazon is pre-qualifying some merchants based upon their performance in the online marketplace. Merchants can apply and sign up completely online and then receive money in their bank accounts within five days following approval.
In Amazon’s business model, the company takes a cut of all sales made on their extensive website. More money for eager businesses to purchase inventory means that more potential sales can be made. This is a “win-win” for both Amazon and its constituent merchants. By selling more products in addition to expanding business operations, these merchants can become powerful propellants to help boost the economy back to pre-recession levels.
“Some of these businesses are only constrained by cash flow. These spot loans will help these folks grow by getting them extra cash to buy more product,” said Scot Wingo, chief executive of e-commerce advisory firm ChannelAdvisor, in a Huffingtonpost interview.
As discussed previously, startup merchant cash advance companies that lend business loans are already in operation. Businesses, such as online merchant lender Kabbage, offer payday-like loans to online businesses such as e-tailers and ecommerce sites. This is similar to Amazon’s current business loan program and shows that lending enterprises are growing and expanding to meet market needs as the internet continues to mature into a fully developed commercial market.
“We’re flattered that Amazon is building a business modeled on ours. It’s validating that big companies are getting into the small business financing space,” Kabbage co-founder Marc Gorlin told the Huffington Post.
Amazon and Kabbage are not alone in their new business loan operations. Wells Fargo, a banking giant, has become one of the few banks that have begun to realize the clear need for online business loans. The bank has not fallen by the wayside but instead has sponsored the promotion of EastPay, an alternative to high-cost merchant cash advances. EasyPay can give a lump-sum up to $100,000 to merchants in exchange for a fixed percentage of the daily credit and debit card sales. These loans sometimes can come with interest rates of roughly 12 percent.
In a way, Wells Fargo is late to the party. Amazon and Kabbage have already recognized the need, demand, and opportunity for online business loans. They have responded to the common business loans questions of how and where to find online merchant financing. Their answer has been direct deposit loans that carry generous interest rates. Big banks, with the exception of Wells Fargo, are likely to be in for a rude awakening as the economy recovers and online commerce grows ever stronger—thanks to efforts of both entrepreneurs and these new lenders.