The internet has created much more than just the opportunity to watch goat videos from anywhere in the world. It has also enabled the rise of FinTech lenders, and with their innovative products and methodologies, these lenders are poised to change the world of small business lenders. In the meantime, they are supporting small business owners in a range of ways.
FinTech Companies Putting Everything On The Line for Small Business Owners; This Is Why:
High Approval Rates
The approval rates on small business loans from big banks have been falling for years. One study from the Harvard Business School indicates that the approval rates at big banks have not improved since the global financial crisis of 2008. This has stymied business growth for nearly a decade.
Currently big banks approve less than a quarter of all business loan applicants, while small banks approve less than half of all applicants and credit unions extend loans to 42 percent of small business owners who apply. Fintech or alternative lenders, in contrast, approve over 60 percent of all the applications they receive. That is more than double the approval rate from big banks, and simply by saying yes to the application in front of them, fintech companies are providing small businesses with the capital they need to thrive and grow.
Contemporary Application Processes
One of the reasons, fintech companies support small businesses through funding is because they employ a contemporary application process. Fintech companies don’t want to wade through lengthy business plans, meet with potential borrowers or waste time mired in credit reports, and arguably, that’s no longer the most efficient way to handle lending. Rather, these companies use a fast, online application and a data-focused approval process.
To apply for a loan from a fintech lender, small business owners hop onto the lender’s website, and they share information about themselves with the lender through the apps and services they, the business owner, uses every day. Depending on the nature of the applicant’s business, they may share information from their bank or PayPal account, their sales numbers from Amazon or eBay, their customer reviews on social media sites, or even their accounting details from QuickBooks. Within a matter of seconds, the fintech lender can assess the information provided and make a fast and accurate decision about funding.
New Credit Models
The most striking part of the risk analysis embraced by fintech companies is that it is not focused on credit scores, and that’s a positive thing for most business owners, who on average have lower credit scores than they did eight years ago. In addition, the plunge in value of many small business owners’ assets makes them look less creditworthy based on traditional models than they looked a decade ago. These economic conditions and financial realities have made it impossible for many small business owners to get the funds they need to invest into their companies, but by subverting the traditional creditworthiness model and speeding up the application review process through technology, FinTech companies have been able to successfully remove the roadblock to funding faced by too many small business owners.
Reduced Risk and Lower Rates
The reduced risk and large pool of borrowers attract underwriters to the world of fintech lending as well. Using their proprietary tools, fintech lenders quickly match applicants to underwriters who are willing to offer competitive interest rates. The result is lower interest rates for borrowers, a fact that has saved many small business owners from the high-interest trap of credit card debt.
Convenient Lines of Credit
Fintech lenders such as Kabbage don’t just offer installment loans. Rather, they offer their clients convenient business lines of credit. These revolving lines of credit give small business owners access to the capital they need when they need it, and unlike a home equity line of credit, these lines are not secured by the borrower’s personal assets. Rather, they are only tied to the business.
With a line of credit, borrowers can spend the funds, repay them and spend them again. This provides a constant level of financial support to the borrower and gives them the financial float they need to get through lean times.
While small business lines of credit are one of the most popular products for small business owners, they aren’t the only offering by fintech companies. In an effort to meet the funding needs of businesses in a range of ways, fintech companies have also refined other innovative products. In particular, some fintech lenders offer inventory loans (loans backed by the value of the borrower’s inventory) and factoring loans (loans based on unpaid accounts receivables).
Dynamic Risk Assessment
Because of their huge range of tech tools, fintech lenders tend to have dynamic relationships with borrowers. Rather than just handing out loans and hoping for the best, fintech companies reassess borrowers on a regular basis. As the borrowers’ picture of creditworthiness changes, the lender may increase the line of credit, lower the interest rate or make other changes to help support the borrower.
Fintech lenders are supporting small business owners in one key way — they are providing these entrepreneurs access to the capital they need to keep their businesses growing. Through their innovative methods, commitment to data and unique products, fintech lenders are changing the world of business lending, and as a result, they are opening it up to more and more business owners every day.