When the Dodd-Frank Act was signed into law in 2010, lawmakers were happy with a bill that was designed to reduce fraud on Wall Street and, by extension, protect the American taxpayer from another collapse similar to the financial meltdown of 2007-2008.
While proponents of the bill were happy with its successes, the Dodd-Frank Act also brought along with it some unintended consequences, as laws are wont to do. For example, the more than 22,000 new regulations that the law placed on banking institutions decreased the number of community banks by 14% between 2010 and 2014—making it that much harder to obtain a small business loan.
Community banks played an integral role in small business funding before the Dodd-Frank Act became law. As the New York Times point outs, these smaller banks—which hold less than $10 billion in assets—were responsible for half of the loans issued to small businesses. But as a result of Dodd-Frank, many smaller banks were either bought out by larger entities or forced to shut their doors for good because they didn’t have the manpower to comply with the sheer volume of new regulations.
Altogether, this made it more different for entrepreneurs to obtain small business loans online. With community banks out of the picture, small business owners were forced to reach out to larger banks to secure the capital they needed to grow their business.
Responding to the market need, however, a number of alternative non-bank lenders emerged as go-to sources for small business lending. Because they are not traditional banking institutions, non-bank lenders are not bogged down by many of the regulations Dodd-Frank created. For this reason, whereas big banks only approve about 23% of small business loans, small business owners are much more likely to obtain financing from non-bank lenders, who approve nearly 62% of the applications that cross their desks.
Not only do small business owners have a much better chance of getting a loan from a non-bank lender, they also benefit in a number of other ways, including:
- A streamlined loan process. Banks still approve some small business loans. Small business owners who go this route will have to submit mountains of financial information and tax documents in what’s grown to become quite a cumbersome and time-consuming process. But if there’s one thing small business owners have in common, it’s that time is never a luxury. Non-bank lenders understand that perfectly, which is why their loan applications can be wrapped up within 15 minutes.
- Fast funding. The lucky business owners who are approved for bank loans won’t be able to put their money to use right away. In fact, it can take as long as two months before cash is deposited in their companies’ bank accounts. Non-bank lenders, on the other hand, approve loans much faster. It’s not uncommon for money to be sent to businesses within 24 hours.
- Increased flexibility. Before lending a small business any money, banks want to know exactly how the funds will be invested. Once a bank learns what a small business owner expects to do with their loan, it’s expected that that’s precisely what will be done. Non-bank lenders are much more accommodating. Small business owners can put their money to use however they see fit. They can hire new employees, develop new products, expand into new markets, or buy new equipment, among other things. Quite simply, the funds are much more flexible.
While the Dodd-Frank Act has made it harder to get funding from traditional banking institutions, it has made it easier to get small business loans online, thanks to non-bank lenders.