Morgan Stanley noted in its report that online lenders lent as much as $7.9 billion to small businesses in 2015. The lending growth of 68% year-on-year evidence that online lending industry is gaining traction and firming up its foot print in the small business market.

But, there is no denial that the online lending channel has a massive room to take over as it has been able to capture only 3.3% of the total small business lending market. At the current rate, it is anticipated that the online lending could claim as much as 20% of the total loan market by 2020 and could even become a $200 billion market on an annual basis.

Why growth is rampant?

Karen Gordon Mills, who has authored, “The State of Small Business Lending: Credit Access During the Recovery and How Technology May Change the Game,” explained the logic that why online lending will take prevalence over traditional sources of funding. Mills added that the absence of cost efficiency in processing small sized loans made banks reluctant to approve them. Moreover, the stringent credit score requirements made several small businesses ineligible to approach banks. This is where the role of online lending platforms comes into play, which is filling in the gap created due to lack of funding options.

Mills highlighted the three common online lending models that are available right now.

1. Peer-to-Peer Lending – Under this platform, lenders connect all kinds of borrowers to both institutional and retail investors. However, the focus is mainly on those borrowers who fail to get loans processed through banks. Lending Club, Funding Circle and Prosper are some of the companies involved in such lending.
2. Small Business Lending – These platforms raise money from institutional investors to extend it to small businesses. The lenders use their own risk evaluation toll to determine risk and credit profile of the borrower. The most known players in such form of lending are Kabbage and OnDeck.
3. Online Marketplaces – Such platforms connect borrowers to multiple lenders, including conventional lenders, thereby raising the probability of getting the loan approved. Biz2Credit and Fundera are few companies engaged in such lending.

While lenders see an improvement in application ratio, most of them believe that there is a greater need for educating small businesses about the presence of alternative options, which in turn can boost the industry growth.