Right now, financial markets around the world are shaken by the current coronavirus pandemic (COVID-19). It’s a fluid situation with an uncertain outcome, and no one really knows what the long-term economic effects will be. The only things that seem certain is that the stock markets are choosing to ignore the pandemic right now, while the core businesses continue to post troubling results.
The underlying data, however, indicates that the major economies are already in recession. And since the cause of these recessions has no end in sight, there is good reason to believe that small businesses, in general, will soon begin to need cash injections if they are to stay in business. flow. This puts the emphasis squarely on the financial sector, which will need to provide the liquidity these businesses need to survive.
The problem is, the traditional financial sector is not very good at providing the kind of assistance needed. Just look to the troubled deployment Federal Paycheck Protection Program (P3) loans to see why. Big banks and other big financial institutions are just not designed to be nimble, and they are known to be difficult for small businesses to work with, even under normal circumstances.
This is precisely where a legion of fintech companies hope to lend a hand. Already, there is a growing list of them stepping in to fill the small business lending void created by the big banks. Here’s a look at how they do it and how it will change small business lending forever.
Big data for loan decisions
One of the ways fintech lenders hope to get cash for small businesses is through a new kind of loan approval process. They use big data to enable quick loan decisions based on factors beyond traditional credit scores and loan history. On the front lines, well-known fintech companies like PayPal, Square, and Intuit have already gained approval to join PPP, giving them the chance to prove they can reach small businesses that big banks can’t – or can’t. would not like.
These companies are leveraging the data they already have from their business customers to gain critical insight into the pre-pandemic health of loan applicants. For example, PayPal can use the average cash flow through a company’s merchant account to decide whether a company is creditworthy, while Square can do the same using data collected by its payment processing terminals. Existing clients of these companies – which tend to be small businesses – have a big advantage in the application process.
But the biggest of them so far has been Funding Circle, a 10-year-old London-based fintech that has long specialized in financial products for small businesses. According to company representatives, their system can process PPP loans in as little as three days, and they have enough cash reserves to take out up to $ 250 million in loans each month.
Changing traditional credit from the inside out
Another way that FinTech companies strive to serve small businesses is by providing the kinds of tools that traditional banks can use to make lending easier for them. This is the purpose of companies like Cignifi, a Boston-based financial services AI developer. Their platform aims to provide lenders with alternative means of rating loan applicants who do not have a long established credit history. He does this by analyzing the history of candidates’ cell phones, and he has seen significant successes in real world use in developing markets.
But Cignifi’s platform would also be a great way to assess the creditworthiness of the roughly 25.7 million small, one-person businesses operating in the United States. often operating under the radar of traditional lenders. Because of this, banks are starting to adopt new scoring methods like those offered by Cignifi – much to the relief of anxious small business loan applicants.
New loan relationships
Offering a generally lower barrier to entry than traditional lending methods, these fintechs provide opportunities for those working with small and medium-sized businesses that some traditional lenders might avoid.
However, there is a caveat. Some small and medium-sized businesses may find fintechs willing to work with them, but at higher premiums than traditional lending partners. Fees and interest rates may seem less attractive at first compared to traditional lending options, but that’s the price to pay for a barrier to entry typically lower than that required by traditional banks and other lenders. old.
As a new and growing field, it remains to be seen how fintechs will cultivate their lending relationships with small and medium-sized businesses.
On the one hand, the technological side of the business offers the possibility that these services are faceless lenders – slot machines that businesses can use through a web interface when they need them.
Or, maybe FinTechs will take a few pages of traditional lending strategies and seek to cultivate personalized relationships with their customers, working to tailor lending options and providing reliable businesses with attractive lending options.
Whether a fintech behaves like a close lending partner or as a simplified way to get a small loan will depend on the structure of each specific business, and will be an important factor to watch closely as fintech loans continue to gain traction. .
Gain long-term market share
While it’s still too early to say what long-term impact the current generation of fintechs will have on business lending, early feedback is promising. Take, for example, the fact that fintech lender Kabbage is currently the third largest PPP lender by volume of requests and works in partnership with 135 different community banks. It provides a vivid example of how new entrants to the industry can capture a significant share of the small business lending markets if they make the right connections in traditional banking.
And this new reality is great news for small businesses because it points to a future where they have a much easier way to get loans and credits. In fact, the more successful today’s fintechs are at lending to small businesses, the more options these borrowers will have for moving forward, as traditional banks will have a record to use in future lending decisions.
There is a good chance that the small business lending space will never return to its pre-pandemic configuration. This is because every day a bumper crop of new highly skilled fintech innovators are bringing new lending approaches to the market, and incumbent businesses seem to see the writing on the wall. At the last count, 60% of credit unions and 49% of banks in the United States expressed their interest in forming partnerships with fintechs. And judging by the success that so many of them have in serving small businesses during this once-in-a-lifetime financial maelstrom, we may be witnessing the birth of what will become a whole new small business lending ecosystem for the 21st century – and not a moment too soon.