LoanWise, a new service from NetEarnings, will target companies ranging from sole proprietorships to 50 employees, a category that the U.S. Small Business Administration puts at 16 million U.S. firms. The service utilizes technology adapted from Fair, Isaac, a software outfit focused on financial services, and checks credit reports with giant Experian (formerly TRW), according to Mike Grossman, chief executive of NetEarnings.
American Express is the marquee lender. Indiana-based Irwin Union Bank is also behind the service, while Internet-only Security First Network Bank (now owned by Canada's Royal Bank Financial Group) and Bank of Hawaii are scheduled to begin lending soon.
Internet services pitched at small businesses are a major growth market, analysts say, but finding cheap ways to reach these companies has been difficult. Because deals typically involve low dollar amounts, a high cost of sales can make the small business market unprofitable.
Conversely, small businesses tend to prefer local banking. For lenders, services such as LoanWise could create a channel for reaching new customers.
"LoanWise has the potential for helping change the way small businesses run their business," noted Bonnie Brooks, an analyst with Creative Strategies. "They don't have to be tied to their local banks any more."
A host of other companies are trying to reach small businesses via the Internet, including IBM, Dell, and a plethora of Web hosting companies that want to create and then host sites for small companies.
At the outset, Loanwise will grant loans up to $50,000. Small-business loans average $35,000 to $40,000, Grossman said. The ceiling will rise to $100,000 over time, though immediate approval probably won't be available on those transactions.
Normally, the evaluation will take fewer than five minutes, and a company can get answers from multiple lenders. Fair, Isaac software rating whether small businesses are creditworthy for loans under $100,000 is widely used by financial institutions, and the online application uses taps that expertise.
Meanwhile, comparison shopping could prove a key feature, because banks that offer small-business loans via their Web sites are likely to push their own products, rather than loans for competitors.
Another important element of the service is the mixing of local lenders with national providers like American Express. Grossman said small firms prefer doing business locally, but nationwide lenders provide competition, in theory pushing rates downward. "It's a market that tends to get neglected," said Grossman, who claims his service is the first to create a marketplace for financing for small firms.
The company expects to bring 25 to 30 lenders onto the service, Grossman said.
Earlier this year, in a six-week pilot with Irwin Union Bank, the NetEarnings system funneled more than $1 million in loans to Irwin, despite virtually no publicity and high rates--as much as "prime plus 7.5 points," meaning 7.5 percentage points higher than the prime rate. NetEarnings expects loans for the most creditworthy small companies to be as low as "prime plus 1.5 points."
Accounting software firm Intuit looms as a possible competitor to LoanWise, but Grossman, who formerly worked at Intuit, thinks it's more likely to be a partner than a rival. In fact, one of NetEarnings' board members is an Intuit executive.
"We've concluded that that isn't the most effective way to be doing lending," Jim Heeger, senior vice president of Intuit's small business division, said in an interview last month.
He described Intuit's offering as enabling lenders to provide loans and lines of credit to small companies. "I think where that will end up is that small business will want to tailor products."
Grossman says he's confident that no other Internet company will get access to Fair, Isaac's ratings engine since his company has an exclusive contract. For Fair, Isaac, LoanWise is the first time its technology has been adapted to use on the Internet, said Anna Solberg, a Fair Isaac product marketer.
Nine months ago NetEarnings launched CreditFYI, a site for companies to immediately get Esperian credit reports and Fair Isaac ratings on the creditworthiness of potential business partners. The company intends to add more services in the are of financial products for small companies, Grossman said.
"We are going to provide access to the mass market of small business for whatever financial products they will find valuable," Grossman said, identifying larger loans, credit cards and other products as planned for the future.