Over the last five years, fintech has erupted onto the financial landscape, changing theparadigm of small business lending. Today’s companies have seen the evolution from traditional bank loans to online lending, digital bill pay and numerous other innovation. Fintech startup companies, which have been ignited by rubbing the financial services and technology sticks together, are transforming the world of finance with their sights set on a $4.7 trillion market of business and consumer loans. That is great news for small businesses, which have largely been shunned by the banking industry. Not only do they now have options for their financing needs, they can get their money in just a fraction of the time it would take with a traditional bank.
How Small Businesses Benefit From Fintech
The central disruptive factor driving the fintech surge is its ability to provide high quality service efficiently and effectively at a lower scale, which benefits small businesses. Before fintech, small businesses had to conform to the large-scale offerings of banks, which often did not serve their real business needs or disqualified them due to strict requirements.
Now, small businesses have a range of offerings from which to choose, including marketplace (peer-to- peer) lending, direct financing, merchant and e-commerce financing, invoice financing and online trade financing. There are numerous benefits that small businesses are finding, thanks to the changes being driven by advancements in fintech:
Access to Unsecured Loans
Small businesses now have access to unsecured financing. Traditionally, for a small business to obtain a loan from a bank they would need to put up collateral. Many small businesses have stable cash flow but no tangible collateral. Fintech lenders do not require collateral. They base their qualifications primarily on revenues. A typical requirement is $100,000 in annual revenue and at least one year of operation.
Looser Lending Requirements
Lending requirements are much looser with fintech lenders because they don’t rely on federally insured and highly regulated depositor money like the banks. The sources of their funds are retail and institutional investors willing to assume higher financing risks. They either raise capital from institutional investors such as hedge funds, venture capitalists or private equity funds, or they pool the investments of small investors through a marketplace lending platform. At the same time, fintech helps them integrate a wider range of factors into their decision making process to help minimize risk and approve a wider range of potential applicants.
Innovative Credit Scoring
Traditionally, small businesses were disqualified from bank lending due to an inadequate credit score or history. Fintech lenders have introduced innovative credit scoring models that extends borrowing opportunities to more people. They rely heavily on non-traditional data points such as a business’ rating on Yelp, UPS data and its interactions with its LinkedIn network. They will also analyze the local market and outlook for the business segment. Whereas a bank relies heavily on human decision-making in underwriting a loan, fintech employs semi-automatic risk assessment methods, which accelerates the approval process and gives credence to a range of useful factors that better reflect a business’ overall positioning and likelihood of repaying the loan.
Lower Borrowing Costs
Fintech lenders operate on low operating costs, with no physical branch and far less personnel than banks, who need experienced staff on hand to service anyone who walks in. That allows them offer more competitive rates to low-risk borrowers, while providing themselves with a wider margin for error with high risk borrowers. Lower operating costs, looser lending requirements and speedy underwriting can also be attributed to the absence of compliance, regulatory obligations and capital requirements, which are required of traditional banks.
Although fintech companies are not about to shut down the traditional banking industry, they are disrupting it ways that will enhance the borrowing experience across the entire spectrum. By introducing new efficiencies, fintech lenders have been able to substantially reduce costs while improving the quality of services. Their innovations in data collection and analytics have opened new avenues for assessing risks. As the fintech lending market expands, it will bring greater diversity and stability to the credit landscape.