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Written by David Seah on September 13, 2016
Around the world, an increasing number of consumers and business owners are engaging with fintech. In the United States, by 2015, nearly a fifth of people had adopted and were actively using at least two components of the fintech ecosystem regularly, and that share is only continuing to grow every month. Where fintech truly has the opportunity to revolutionize, however, is in the word of business lending where companies are opening up sustainable, easy and fast funding to a whole new crop of business owners.
What Do Fintech Companies Offer Small Businesses?
The fintech ecosystem includes a range of companies offering a vast number of services to businesses and consumers. Fintech companies provide small businesses with tools to collect payments more easily, regardless of where they are. Apple and Samsung Pay as well as PayPal and Square are prime examples of fintech companies that are altering the POS experience by reducing the demand for expensive equipment and hard-to-understand software. Other companies are also stepping in to handle backend processes such as payment processing, payroll, accounting and invoicing.
Small businesses also have access to lending services through fintech companies that offer business lines of credit worth up to $100,000. However, these companies aren’t stymied by traditional notions of what business lending should look like. They also offer other innovative ways for businesses to access funding such as microloans, inventory loans, factoring services and other niche capital opportunities. Companies who want to use equity financing but lack connections can turn to fintech services such as SeedInvest and Gust, while those that prefer not to dilute their ownership may turn to crowdfunding companies for help.
How Does Applying for a Fintech Loan Differ from the Traditional Application Processes?
Whether a small business owner is interested in equity financing, peer-to-peer lending, a business line of credit or any other type of capital, applying varies from the traditional process used to access business funding. With peer-to-peer lending, equity financing and crowdfunding, business owners create a profile which they upload to one of the platforms that offer this type of funding.
Then, in some cases, the applicant shares information about their credit scores or business accounts, which the platform uses to enhance the profile. Finally, investors and lenders look at the profiles to figure out which businesses they want to fund and the capital exchanges hands. Without the power of these platforms, it would be impossible to pair these eager investors with fledgling business owners, entrepreneurs, inventors and others who need startup capital.
The process is similar for business owners who want a line of credit or a small business loan. Rather than drafting business plans, meeting with loan officers, submitting to credit checks and jumping through other financial hoops, business owners simply create a profile. In this case, they do so by linking their business accounts to the fintech company. For example, if a small business owner with an Etsy shop and a brick and mortar boutique were applying for a loan, they would likely link various online accounts so that the lender could see the flow of payments into PayPal, the average daily balance in their checking account, seller reviews on Etsy, comments and engagement on social media channels and other relevant information. Using this data, fintech lenders create a picture of the business owner’s credit worthiness, which is arguably more accurate than a FICO score could ever be. Because the image of the borrower is so complete, fintech lenders have an easier time matching borrowers with underwriters who are willing to offer relatively low interest rates.
How Do the Rates on Fintech Loans Compare to Traditional Loans?
Fintech loans are powering small businesses in unique ways, but it’s not just about the revolutionized application process – it’s also about giving small businesses higher rates of acceptance on loan applications, paired with competitive interest rates.
As of July 2015, fintech or alternative lenders approve over 60% of loan applications, compared to approval ratings of just below 50% for small banks and roughly 22.5% for big banks. Because of the competition involved in accessing credit from big banks, traditionally, many small business owners have turned to credit cards. Credit cards tend to have relatively high acceptance rates, and many companies even specialize in offering cards to high-risk borrowers, increasing the chances of accessing credit.
However, the inherent downfall of credit cards is that cardholders tend to purchase more with less consideration, they are willing to spend nearly twice what a product costs when buying with a card, and they often get locked into debt for decades due to only making minimum payments. Fintech lenders are essentially saving small business owners from the credit card trap. They offer lines of credit that can be linked to the business owner’s bank account, and they insist upon repayment schedules that are sustainable, meaning the account holder is more likely to pay off his debts than remain locked in debt. Finally, compared to credit card penalty rates of over 30%, fintech lenders advertise that their rates on business loans range from 1.5 to 12%.
Fintech is powering more and more companies in a vast range of ways. Business owners can now focus on the type of funding they want, they can create a picture of themselves that truly represents their work ethics, ideas and creditworthiness, and, finally, they can access capital more easily, more efficiently and faster than ever before. As the fintech lending industry continues to grow, it is likely to allow more and more businesses that would have never had a chance in the traditional financial scene to open their doors, expand their offerings and enjoy unforeseen levels of success.