Virus adds customers for online loan sites

Ahmande Grimes, owner of Spartan Financial, a financial services broker, poses for a portrait Monday, May 24, 2021, in Nashville, Tenn. When Grimes applied for a relief loan through his two traditional banks during COVID-19, the process seemed as complicated as applying for a mortgage. When he turned to an online lender, his application was quickly accepted and sent to the SBA. As a result, Grimes is considering a complete move to online banking, not just for borrowing. (AP Photo/Mark Humphrey)
Ahmande Grimes, owner of Spartan Financial, a financial services broker, poses for a portrait Monday, May 24, 2021, in Nashville, Tenn. When Grimes applied for a relief loan through his two traditional banks during COVID-19, the process seemed as complicated as applying for a mortgage. When he turned to an online lender, his application was quickly accepted and sent to the SBA. As a result, Grimes is considering a complete move to online banking, not just for borrowing. (AP Photo/Mark Humphrey)

NEW YORK -- Some small businesses forced to turn to online lenders for pandemic relief are making those niche players a bigger part of their financial game plan, and are even considering dumping their traditional banks altogether.

Loans from online lenders saved thousands of small business owners who were unable to get covid-19 relief loans from big traditional lenders. Now, encouraged by getting applications processed within days rather than weeks, these owners are becoming repeat customers.

Speed can be the difference maker for an owner in need of a loan. A traditional bank loan can take weeks between the application and the money arriving. Online lenders don't have to comply with federal government regulations as banks do, so they can turn applications around faster, sometimes within hours.

Patrick Carver was loyal to his big national bank but became disillusioned after applying for a Paycheck Protection Program loan, not getting a response for over a month and then having his application denied. At the suggestion of a friend, Carver tried an online lender -- his application was approved in four days and he had the money within a week. If he needs another loan, he'll start with the internet.

"Anything related to my business that requires swift action, I'll likely go with one of these companies that's built for speed," says Carver, owner of Atlanta-based Constellation Marketing.

The recently ended Paycheck Protection Program gave out more than 11 million loans worth more than $788 billion. Banks were overwhelmed by more applications than they were used to handling, and many larger applicants got their loans processed ahead of smaller businesses.

Some small companies with established banking relationships were rejected because they didn't have the right mix of accounts. Others never heard back or were turned down without explanation. Many desperate for cash then turned to small banks or online lenders whose target customers are small businesses.

Online and other state-regulated lenders handled nearly 251,000 Paycheck Protection Program loans totaling more than $6 billion in 2020, according to the Small Business Administration, which approved the loans. In the 2021 round of lending, which ended May 4, those companies made more than 1 million loans totaling nearly $21 billion. Those dollar amounts accounted for only about 1% of the program's money, but it was cash many businesses couldn't get elsewhere.

Ahmande Grimes is considering a complete move to online banking, not just for borrowing. He had considered an online loan before the pandemic, but believed at that point that traditional banks were the best route.

"My experience through 2020 was really an eye-opener regarding the differences between online banking and traditional banking," says Grimes, who owns Spartan Financial, a financial services broker in Nashville, Tenn. When he applied for a relief loan through his two traditional banks, the process seemed as complicated as applying for a mortgage. When he turned to an online lender, his application was quickly accepted and sent to the Small Business Administration.

Grimes is looking into online banks that provide checking and other services. Because he doesn't handle cash in his business, all his transactions can be carried out electronically.

"I believe that there is an online bank with the services that we need," he says.

A 2018 study by the Federal Reserve and the Federal Reserve Bank of Cleveland found owners want the relationship a traditional bank can offer -- but they like the efficiency offered by online lenders. But there's a downside to the ease and speed online lenders offer: cost.

Some online loans carry interest rates that top the 20% business credit cards can carry. Traditional business loans are likely to have rates under 10%. (This wasn't an issue with the Paycheck Protection Program: Congress set the rate for all loans through the program at 1%.)

Paying a higher interest rate can make sense, Carver says.

"Money is important, but time is also a big part," he says.

There are varying estimates of the size of the online lending market for businesses, but it's well into the dozens of billions of dollars and is expected to grow by double-digit percentages in the next few years.

The Paycheck Protection Program raised the profile of online lenders like PayPal and Square, says Karen Mills, who headed the Small Business Administration during the Obama administration and now is a research fellow at Harvard University. These companies based their lending on information in their own databases, payment histories being one example.

For Grimes, online banks are in the best position to give him the kind of help he needs because they once were startups.

"They were a small business. They understand me. They are me," he says.

Ahmande Grimes, owner of Spartan Financial, a financial services broker, poses for a portrait Monday, May 24, 2021, in Nashville, Tenn. When Grimes applied for a relief loan through his two traditional banks during COVID-19, the process seemed as complicated as applying for a mortgage. When he turned to an online lender, his application was quickly accepted and sent to the SBA. As a result, Grimes is considering a complete move to online banking, not just for borrowing. (AP Photo/Mark Humphrey)
Ahmande Grimes, owner of Spartan Financial, a financial services broker, poses for a portrait Monday, May 24, 2021, in Nashville, Tenn. When Grimes applied for a relief loan through his two traditional banks during COVID-19, the process seemed as complicated as applying for a mortgage. When he turned to an online lender, his application was quickly accepted and sent to the SBA. As a result, Grimes is considering a complete move to online banking, not just for borrowing. (AP Photo/Mark Humphrey)

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