Banks are gearing up to outsource the loans provided to small businesses. They are not showing any interest in competing with alternative lenders who cater to low-dollar loans. Last week, a US subordinate group of a Spanish lender, BBVA Compass, paired up with OnDeck, an online lender to provide short-term loans to small businesses.
According to the terms of the deal, BBVA Compass, will be marketing OnDeck's loans to all its customers tied with small businesses, while OnDeck will cater to the loans and repayments. The news comes in the occurrence of other such events where banks have begun to outsource lending to small businesses, as they typically do not make appreciable returns from loans that are relatively small.
More banks team up with alternative lenders
New York-based lending company, QuarterSpot that promotes its easy-to-use application process, has shelled out fees to community banks in return for referring customers. Estimates reveal that alternative lenders who catered to loans under $100,000 operating on terms that were under a year, made lending of about $3 billion during 2013. OnDeck, which caters to loans averaging about $40,000, made loan lending of the order $475 million through small business funding during 2013. Small Business Administration promised loans of nearly $ 1.5 million for $150,000 or lesser amounts last year.
Alternative lenders offer expensive loans
Loans offered by OnDeck are easier to obtain than bank loans. The company provides application processes online through which loans of up to $250,000 are approved within a few minutes. These loans tend to be more expensive than bank loans, and the interest rates are often in multiples of their bank credit counterparts.
BBVA Compasses's small business branch Director, Lonnie Hayes, did not reveal whether or not the bank collects referral fees to send customers to OnDeck. He declined to comment on an exact figure that customers may have to shell out for loans with OnDeck. He said that deal rates are in the same range as credit card Annual Percentage Rates (APR) for businesses. A credit card lending tracker, Card Hub, revealed that the average rate of APR for business credit cards is 16 percent. This means that customers can obtain loans at cheaper rates from BBVA Compass than OnDeck. The rates can shoot up to nearly 134 percent with the annual weighted average interest rate standing at 54 percent for 5,397 loans.