Staples And Jack Henry Offerings Promise Yet Hotter Market for Small-Biz Funding

Funding for small businesses has been an increasingly important source of revenue for independent sales organizations and other merchant acquirers, but they’re not the only parties that have noticed the market’s lucrative potential. Now, banking-technology vendors and even large merchants are getting into the game.

Jack Henry & Associates Inc., a Monett, Mo.-based vendor of digital-banking solutions, on Wednesday introduced its Commercial Lending Center, a portal that allows client banks to accept and process small-business loan applications online. Also, office-supply chain Staples Inc. was expected Wednesday to offer more detail about a small-business lending venture it has set up with Lendio, a Salt Lake City, Utah-based Web site that connects lenders and borrowers.

At the same time, merchant processors continue to link arms with funding sources to enable fast loans for their portfolio of merchants. The latest example, announced Wednesday, is a partnership between Atlanta-based processor Worldpay and leading small-business funder CAN Capital Inc., New York City.

The hotter competition for small-business funding comes as ISOs and other alternative lenders increasingly fill a void left by banks. The total volume of alternative loans to small businesses, which stood at $4.4 billion in 2013, grew to $5.25 billion in 2014 and is expected to expand to $6.17 billion this year, according to The Strawhecker Group.

At the same time, credit conditions in the small-business market have never been better. The Experian/Moody’s Analytics Small Business Credit Index reached 116.7 in the fourth quarter, up from 115.2 in the previous quarter and an all-time high. The index measures conditions for firms with 100 or fewer employees. Factors driving the index include lower delinquency rates and accelerating job growth among the firms.

As banks withdrew from the market, ISOs found funding linked to credit card receivables a natural add-on to the basic sales pitch for merchant accounts. In addition, new entrants like merchant aggregator Square Inc. have found success with programs that link lending with card processing. The company’s Square Capital service had lent $75 million to some 15,000 by November, after just six months in operation.

Similarly, PayPal Inc.’s Working Capital program had by December funded 20,000 mostly e-commerce merchants to the tune of $200 million. And small-business funder Kabbage Inc., which has specialized in loans to e-commerce businesses, recently began offering funding to brick-and-mortar merchants.

But now these and a slew of other alternative lenders, which rely heavily on streamlined, automated underwriting processes that allow small merchants to get fast funding, face new competition as office-supply supermerchant Staples, Framingham, Mass., prepares to enter the market.

And even banks, which have either struggled to serve the market online or withdrawn from it, could get back in the game with the new offering from Jack Henry’s ProfitStars division. “In a 2014 survey of community banks, ProfitStars found that community institutions were far behind their alternative-lending competitors in terms of both convenience and speed offered to [commercial and industrial] borrowers,” the company says in a news release.

The survey found that 92% of banks did not even accept online loan applications. Meanwhile, “84% did not effectively use technology to streamline and manage the lending process,” the release says.

The new portal, hosted by Jack Henry but branded by the bank, gives client institutions the ability to process online applications, speed up response time, and otherwise streamline underwriting.

With competition for small-merchant funding now at new peaks, the stakes for banks couldn’t be higher. “Community bankers need to make lending convenient for small-business owners or they will continue to pursue alternative lenders and other competitors to meet their borrowing needs,” said Russ Bernthal, president of ProfitStars, in the release.