Next time you stop by a Joe Coffee shop for a cup of joe, or United by Blue to buy clothing or accessories, know that you are in the midst of a financing revolution known as alternative lending.
Both start-ups have grown because of it. So, too, have talks in Washington on whether it requires more regulatory scrutiny.
Alternative lending is partly inspired by the raise-it-quickly popularity of crowd-funding to help entrepreneurs get ideas to market. The lenders, funded by private investors, aim to serve the nation's 28 million small businesses with loans of $50,000 to $500,000 - sizes that banks consider too time-consuming and costly to offer.
"We are all filling the gap where banks aren't lending today and ultimately pushing to create better customer experiences," said David Haber, a 27-year-old Harvard University graduate and cofounder of New York-based Bond Street, which made loans to Joe Coffee and United by Blue.
He and another Harvard alum, Peyton Sherwood, quit jobs in marketplace and financial services investments (Haber) and mobile-payments development (Sherwood) at the end of 2013, having recognized a need in small-business lending.
By "better customer experiences," Haber means speedy approvals on loan requests, in as little as 48 hours, enabled by electronic business and banking records.
Joe Coffee's two experiences with Bond Street - loans of $200,000 and $175,000 to open two stores in Manhattan - each took five to seven business days from initial contact to loan approval, said Brandon Wall, chief operating officer for the 12-year-old family-owned chain of a dozen stores. Philadelphia's two Joes - on Rittenhouse Square and in University City - opened in 2013. The rest are in Manhattan.
"That's incredible timing," Wall said, adding that time can mean the difference between getting and losing a store site.
"It's a very competitive process when we find a prime location," Wall said. "We need to be able to get to lease signature very quickly. Part of that requires security deposits and first month's rent. As a small business, a lot of us don't carry these huge cash balances. We need to find that outside funding very quickly."
Brian Linton, cofounder of five-year-old United by Blue, raved about the all-digital 10-minute process for securing a one-year, $200,000 loan from Bond Street. Approval came in less than a week, he said, attributing that, in part, to Bond Street's sensitivities as a start-up.
"They understand what a start-up is trying to do," Linton said, adding that the ease and speed of the application process is worth "a few extra [interest] percentage points." His is in "the low teens," as opposed to what would be closer to 8 percent with a traditional bank loan.
Bond Street's average loan is $180,000; its average interest rate, 11.5 percent, Haber said.
The short-term financing typical of alternative lending - usually one- to three-year loans - is not something every small business can afford, cautioned Carl Knoblock, district director for the Virginia office of the U.S. Small Business Administration.
"You really have to do your homework," he said.
With alternative lending still a relative blip in the world of lending - estimated at $9 billion in loan volume last year, according to American Banker - its regulation (and which agency should oversee it - the Consumer Financial Protection Bureau and the Federal Trade Commission are among those being considered) remains a matter of discussion in Washington. So far, it's largely been an industry embraced for offering small businesses alternatives to capital beyond loading up their credit cards.
"People are trying to understand: Is this a fad or is this something that's going to take hold," Knoblock said.
A hybrid in the alternative-lending space, Marlin Business Bank in Mount Laurel launched FundingStream.com in July, allowing small businesses to apply online for loans of up to $100,000 in less than 10 minutes, with loan decisions made in as little as two hours and funding available as quickly as two days. Repayment terms are six to 24 months.
The bank, which has specialized in equipment financing since its 1997 start, identified this as a promising niche from its own customer base, said Russell Walraven, vice president of loan marketing.
"There's been an almost anti-bank sentiment out there," Walraven said. "Now people are saying we don't have to do it that way anymore."
How many alternative lenders there are is difficult to quantify, given the lack of regulatory oversight, industry observers say. Walraven predicts a consolidation in the next five years, with "banks doing the consuming."
At Bond Street, which issued its first loan a little more than a year ago after raising $1.5 million in equity financing, and another $110 million more recently, Haber is focused on right now. He recently traveled to Washington to meet with Treasury Department officials to discuss the importance of more transparency in the still-maturing industry.
"This is an easy business to hang a shingle in," Haber said. "It's easy to put up a website. It's actually a very hard business to build. You really need to understand risk."