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Finance & Accounting, Small Business Loans

A Brief History of Online Lending

It took a while for the idea of internet lending to really catch on, but the past decade has seen the emergence of many successful internet lenders.

Certainly, online lending platforms may have disrupted the loan industry recently; but they mostly used financial technology, often called fintech, to improve upon lending models that have existed for centuries. According to historians, formal lending dates back at least as far as Ancient Rome. Still, it’s likely that informal lending has its roots in the dawn of human history. Most likely, the first loans were personal loans between individuals. These personal loans are not so different than the peer-to-peer lending made possible by P2P lending platforms today.

The Earliest Examples of Online Lending

Online Lending in the 20th Century

It usually takes a long time for borrowers to qualify for mortgages. By the mid-1980s, Quicken Loans introduced a more rapid loan process to the market. The company found that they could speed up loan processing by transferring a lot of application and review steps from paper to computers. Since the internet wasn’t as prevalent with consumers as it is today, this first online lending business had limits.

At the very end of the 20th Century, First Internet Bank emerged. Consumers could apply for a loan from their home or office computer, and they didn’t actually have to visit a bank or speak with a loan officer. Online banking did not replace traditional banks, but it motivated those traditional banks to put their own online banking in place.

Alternative, Online Lending in the Early 20th Century

It was not just banks and other finance companies that noticed online lending. Very soon, all sorts of entrepreneurs thought up ways to use the internet to provide accessible loans to the growing number of online consumers. Very often, people think of peer-to-peer lending platforms when they think about online, alternative loans for consumers. It’s true that P2P lenders have become popular, but they aren’t the only source of financing.

  • P2P lenders: The first major P2P lending site began in 2006. This kind of platform serves as a sort of middleman between borrowers and individuals who hope to invest in loans. Lending platforms like these usually limit the size of loans to fairly modest amounts, but they might make both borrowing and lending more accessible than banks and finance companies can.
  • Online small business lending platforms: P2P lending sites attracted a lot of attention; however, they tended to limit loans to several thousand dollars. Also, borrowers have to set up profiles and wait to attract investors to their own request for financing. Business owners may not find these loans suitable for their company’s financing needs. Kabbage is an example of an online business lender that emerged to address these types of needs. These business lending platforms can offer loan amounts that can range from a few thousand up to $100,000, and they can approve and fund these loans very rapidly.

In addition, these internet business lenders can use many different sources of information about a business to qualify borrowers. Some businesses may not have established a great credit score yet. With an online lender for small businesses, companies can demonstrate their creditworthiness with data from payment processors, online retail platforms or company checking accounts. By 2014, almost 20 percent of small businesses applied for financing with an online lender.

The Future of Online Lending

In contrast to traditional lenders, online lending platforms can offer speed and transparency. In some cases, the efficiency of operating online helps some of these lenders approve borrowers who might not qualify for a loan from a bank or similar lending institution. For example, NerdWallet reported that by the end of 2015 nearly 80 percent of small business owners checked online first to seek financing for their companies.

People conduct all kinds of business transactions online that they used to perform in person. This includes shopping, paying bills, researching business decisions, and of course, applying for loans. As both consumers and business owners grow more comfortable with conducting business over the internet, online lending is also expected to continue to grow.


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Kabbage Team

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