Why Lending-as-a-Service is the Future for Small Businesses

Companies can raise capital in a variety of ways. To keep growth increasing, many startups and smaller ventures go to the bank for a loan. Lines of credit, venture capital, angel investing and other methods exist as well, but a straightforward loan has always had the biggest advantages for a young company.

Since 2008, the lending industry was forced to transform. What emerged was a far cry from what once was — but borrowers loved it. Though institutional lending has faced several challenges in the last few years, a new segment of small business lending is experiencing extreme growth: lending-as-a-service (LaaS).

What is Lending-as-a-Service?

Lending-as-a-service is a new twist on an old banking function, the lending of capital. LaaS companies use the latest advances in software to streamline the lending process, making it inexpensive and swift. Not for lack of technology, this was not common in the pre-2008 financial era, but the results are now gaining credence — and customers as well.

It might take weeks to procure a loan from a bank due to requirements like paperwork, in-person identification, bureaucracy and a lack of connectivity between branches.

Now, lending-as-a-service leaders like ezbob, by contrast, can help borrowers access financing in as little as 30 minutes. They can accomplish a feat like this due to a proprietary automated system for verifying creditworthiness, finding suitable loans, and offering these options in real-time to users.

Tomer Guriel, the CEO of ezbob, views his company as a technology solution that helps ease the often tenuous procedure of lending. And the idea for ezbob is grounded on experience with banks and the lending sector.

“The idea of being a technology provider was born in 2012. At the time, we teamed with Accenture in order to sell our platform to banks. Unfortunately, at that time, the banks were not ready to work with a start-up, Fintech. The only way we could get the business off the ground was to start lending ourselves.”

How Did We Get Here?

Post-financial crisis, credit from many large institutional banks largely dried up. In the four years after 2008, lending from banks to small businesses fell by $120 billion. It does not matter whether this was due to all-time low trust in banks, or simply less business to go around.

Afterwards, small businesses which did not want to give up were forced to find alternative sources of capital, many from high-rate lenders.

Eager to avoid a repeat of 2008, regulators installed laws making transparency and accessibility of data a requirement for any financial institution. While banks slowly adjusted, the fintech industry rose from the ashes and worked quickly to apply technology to finance before offering a streamlined solution to customers. This has not made banks obsolete, but represents one of the best choices a small business has when it needs a cash injection.

Small Businesses and LaaS: A Match Made in Heaven?

Banks remain an excellent way to find funding. As the wake of the last depression becomes less turbulent, however, banks have fallen behind. LaaS has taken up residence in the void, and small businesses are flocking to these companies for funding. Why?

Quick Turnaround

Smaller companies are more time sensitive than larger firms and are also more exposed to market conditions. They have less maneuvering room, and their needs are always more urgent than those of major companies with high capitalization. For filling payroll, taking advantage of a growth opportunity and more, speed is crucial for small businesses, because the cost of failing to meet these small milestones is significantly greater.

This is the primary reason that small businesses prefer LaaS loans. Borrowers can access funds at the snap of a finger, when compared with institutional behemoths, which operate with frustrating sluggishness. Quick funding empowers small and medium-sized businesses to be flexible and free, rather than tied up collecting all the bank’s necessary paperwork.

Trust in Tech

The trust that people place in their cellphone’s social media platforms is increasingly applied to traditional areas like lending. Technologies like the kind running new age lending applications is powerful and safe, and often more secure than the systems once used by big banks. With encryption, private networks and full compliance with regulators, small businesses see no reason not to use these services.

Cutting the Bottom Line

The manpower once required to propel a loan application through a bank’s bureaucracy is entirely unnecessary with LaaS. Because algorithms and software can be trusted to accomplish the same tasks, the process is much cheaper for alternative lenders. In turn, these savings are passed on to the borrower.

Bringing Banks Into the Fold

Many lending-as-a-service services are not looking to compete with banks, but rather to assist them. The capital backing their loans for their cutting-edge systems find must come from somewhere, and banks are the perfect place. In the most common type of LaaS and bank relationship, the LaaS software platform simply finds candidates that can match the bank’s existing loan standards. This affiliate-type relationship is beneficial to both parties and customers as well, who can access an inexpensive loan backed with the credentials of a traditional brick and mortar institution.

LaaS Leading the Way

As new regulations and financial practices become the standard, the lending-as-a-service industry will simply become the lending industry. The public support for LaaS makes this almost an inevitability, and the markets have already tested and largely proven the model. Small businesses have more financing choices in front of them than ever before, and few can argue against the economic benefits of such a trend.

Fintech Photo via Shutterstock

This article, "Why Lending-as-a-Service is the Future for Small Businesses" was first published on Small Business Trends