Partnership will make small-business loans more efficient for community banks

More than 200 small banks across the country will be able to offer online loans to their small-business customers as part of a new partnership.

Under the deal, community banks that are part of the BancAlliance consortium can refer customers who may not be the right fit for traditional bank financing to a website built with the online lender Fundation.

Ultimately, the loan may be funded either by New York-based Fundation or the partner bank. That determination will be made based on various factors, including the business owner’s needs and creditworthiness.

For participating small banks, the idea is that improved efficiency will allow them to profit from smaller-dollar business loans that currently do not make economic sense.

“This program will dramatically broaden the number of small business customers that can be served through the community bank system,” Fundation Chief Executive Sam Graziano said in a press release.

Meanwhile, Fundation is expected to lend to many applicants who do not qualify for loans from participating banks. In those instances, the banks will get paid a referral fee.

The deal bears similarities to a consumer lending partnership that BancAlliance and Lending Club announced in February 2015. Under that arrangement, some loans are funded by the participating banks, and others are financed by investors on the Lending Club platform.

Loans made through the Fundation partnership will be for $1 million or less, and they will not be principally secured by a piece of equipment or other hard collateral.

But beyond those broad parameters, it will be up to the participating banks to determine which products and terms they want to offer. “Each bank gets to customize what it wants to provide to its customers,” said Brian Graham, the CEO of Alliance Partners, which manages the BancAlliance network.

Over time, additional lenders are expected to join the online portal. Those companies could include nonprofit lenders that specialize in microloans to newly formed businesses and firms that make loans backed by the Small Business Administration, according to Graham.

Fundation currently offers business loans between $20,000 and $500,000. The firm’s loans have terms of one to four years, and they carry annual percentage rates of between 7.99% and 29.99%. Unlike some other online lenders, Fundation’s loans do not have prepayment penalties.

Fundation, which was founded in November 2011, has made partnering with banks a key part of its strategy. In October, it announced a partnership to make cobranded business loans with Regions Financial.