How Online Marketplace Lending Encourages Small Business Growth

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Online Small BusinessNot many startups grab the attention of venture capital investors and most traditional financial institutions. Fortunately, advantages in technology and availability of data are transforming the way small businesses secure funding.

With the rising presence of lenders in the online marketplace, small businesses turn to the alternative to help them create wealth. Here are three ways online marketplace lending encourages small business growth.

Online Lenders Fill Funding Needs of Small Businesses

Since securing venture capital investment is increasingly becoming competitive, small businesses seek funding from alternative lending services online. Alternative online lenders usually offer lower interest rates and make the lending process quicker and easier, which is good for starting businesses.

But following the global financial crisis and economic recovery, online alternative funding for small businesses has seen significant growth. Since the onset of the financial crisis, online lenders have become go-to for for-profit businesses, and this surge is also a contributing factor to why the balanced portfolio of online lenders has grown about 175 percent compared to the three percent decline in the traditional financial sectors.

Matchmaking and Market Making

Why innovative online marketplace banking works well with small business funding is because peer-to-peer lending follows a direct approach to making lending decisions. Because transactions take place online and no longer require a common bond between the lender and borrower, small businesses that have great growth potential no longer have to tap into networks and financial intermediaries to acquire funding. Industry reports show that borrowers are increasingly becoming wiser, which has compelled online lenders to become more transparent and liquid with their transactions to maintain public trust.

Collective and Sector Growth

Charles Moldow, an investor in P2P lending clubs and Silicon Valley venture capital firm Foundation Capital, says that alternative online lending is a “trillion dollar market by the people, for the people.” It’s a symbiotic relationship, where the online lender enjoys higher yields while the borrower enjoys lower interest rates and more lax payment terms. Apart from creating wealth for small businesses, transactions help online lenders improve their regulatory policies and address regulatory challenges that have tainted the industry for quite some time.

Alternative online marketplace lending is truly a great way for individuals and businesses to secure funding without hurting their chances for growth and sustainability. Perhaps traditional financial institutions should learn from these lending innovators.