Small and mid-size businesses that have trouble securing a loan from traditional banking sources have a new option in their search for working capital.
The Tucson Hispanic Chamber of Commerce partnered with The Credit Junction, part of a growing wave of online-based marketplace lenders, to offer loans from $200,000 to $2 million in Southern Arizona.
“We have many banks and credit unions that are members of our chamber and they’re the first place we send businesses, unfortunately in this economic environment not everybody gets approved,” said Lea Marquez Peterson, chamber president and CEO.
Marketplace lending, also known as peer-to-peer, allows nonbanks to lend to businesses or individuals without a traditional middleman. These companies evaluate credit risk more broadly, often through proprietary technology, and are able to offer loans to borrowers that many banks are not willing to service.
“Our platform is connecting small businesses with institutional capital, including asset management firms, traditional banks, hedge funds and private equity,” said Sergio Rodriguera Jr., chief strategy officer at Credit Junction.
The company differs from most other marketplace lenders in that they offer larger, asset-based loans secured against inventory or accounts receivable, officials said.
A typical client is a supplier, manufacturer or distributor in a variety of industries, Rodriguera said, including oil and gas, aerospace and defense, transportation, infrastructure, consumer products and agriculture.
“There are more manufacturers and more logistics that are going through Arizona from Mexico,” he said. “Those are ideally the types of businesses that we like to help.”
Loan rates vary from 9 percent to 19 percent and payments are monthly, with terms from six to 24 months. A decision on the loan is made within 24 hours, officials said.
“Asset-based lending is something that can be moved on very quickly, it doesn’t take months and months to get approval,” Marquez Peterson said. “If we have all the paperwork together for the client we can go approval to funding within 10 days. That’s important when you have a business opportunity.”
Marketplace lending existed before the Great Recession but didn’t pick up traction until after the financial crisis, when increased regulations made banks more reticent to lend money, experts said.
While this alternative financing model is growing fast, it still represents far less than one percent of all lending, said Michael Bond, a finance professor at the University of Arizona’s Eller College of Management.
So far there seems to be little downside in taking advantage of marketplace financing, but as with any financial product, care should be taken.
“The big risk to the borrower is it may allow them to take on more debt than they can pay off. Obviously, that’s a risk to the lender, too,” Bond said in an email.
