A New Lending Option for Small Businesses: Will it Help?

If you’ve read the headline, you might be asking yourself if we really need a new lending option for small businesses. And our answer is… maybe! This one is from Amazon and Goldman Sachs, two very successful businesses. Amazon is the leader hands down in maximizing its platforms. Goldman Sachs is a top-notch investment bank. One plus one doesn’t always equal two, so the question is will they be able to pull it off? Will it offer something different, or just more of the same?

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Small Business Lending is Hot

As we’ve said in our other posts about the lending ecosystem, everyone is trying to tap into this market. As we’ve also said in posts like “Secrets of Small Business Funding Unveiled,” this can be a double-edged sword. Remember the rush for sub-prime mortgages? Overall, more competition is good for us. BUT it is important that your business is truly ready for a loan.

So, What Is This New Lending Option?

It’s been reported by the LA Times that  

Goldman Sachs Group Inc. is close to striking a deal with Amazon.com Inc. to offer small-business loans to its U.S. customers as the Wall Street bank turns to Big Tech to extend a push onto Main Street 

Goldman wants to tap into this market and has developed a tool to help offer loans to smaller businesses. It is a natural fit to want to leverage Amazon’s platform to distribute this technology. Amazon has a lending platform, but it’s really nothing that differentiated. If Goldman’s technology proves to be superior, then they both stand to gain. Amazon can get a differentiated lending technology to make it stand out. Goldman gets instant distribution to one of, if not the, largest platforms in the world.

Amazon is already a lender

Amazon had nearly a billion dollars its balance sheet in 2019, according to the Financial Times. “For the last eight years it has lent to small businesses that sell on its site, using the data it holds on their cash positions to offer quick-decision loans in a handful of countries”. In their quest to be the marketplace of everything, this is on strategy. Whether it is a winning strategy in the long-run, time will tell. 

Goldman is trying to diversify

In 2019, Goldman struck a partnership with Apple to offer credit card services. This has allowed them to expand into the consumer market. This would seem to be a logical extension.

When could it happen?

It could launch as early as March 2020, but I think that’s aggressive. I’d bank on some time in Q2 2020. 

Why Should I Care?

New alternative lending options come along often. Why does this one matter? Well, it impacts small business, especially those struggling to get credit, in two ways. 

More Competition = Better Rates in General

First, it provides another option/avenue for financing or getting loans. More competition usually means better rates and lower cost of capital. Good, right? Yes, but. Competition can also lead to risky bets by lenders. If there is a sudden downturn, which creates a string of defaults, lenders can run into trouble. And we’ve often talked about how growth can increase long-term success in businesses.

Easy Money is Great, BUT It Can Put Your Assets at Risk

This leads us to the second reason you should care. It’s caveat emptor for all of these lending providers targeting small businesses. Just because you can get a loan doesn’t mean you should. I know, that’s easier said than done when cash gets tight. However, defaulting on easy money is just as bad as on hard. If you are using these loans for working capital, rather than a hard purchase or some other tangible asset, you will likely be required to sign a personal guarantee. Many owners mistakenly believe that you can default on business loan without hurting your assets. But, if you signed a personal guarantee, your assets are at risk as well. 

New Lending Options, in Summary

In general, I believe more competition is good for small business. Not 10 years ago, we were limited primarily to banks, which made access to capital a major barrier. As new lending options develop, there are new ways to secure small business loans. For the most part, these changes are good. But, like everything else, they also may have unintended consequences. To me, this feels very similar to the sub-prime rush in the early 2000s. If the past is precedent, then this could end badly. I’m not saying don’t do it. I am saying do it with your eyes wide open.

At ProStrategix, we know you have concerns.  We’re designed to help give you the business support you need so you can focus on doing what you love.  If you would like to learn about how we might be able to help you, please contact us.

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