3 Ways FinTech Startups are Changing the Online Lending Space

Guest post by  Eric Goldschein

In major economies around the world, such as in the U.S. and U.K., small businesses employ about half of the working population. Their impact—financially as well as culturally—is enormous.

But due to their lack of collateral and limited credit histories, small businesses don’t get the same opportunities to acquire funding as big corporations, or even individuals looking for personal loans.

There has long been a disconnect between new, innovative small businesses and the financing they need to help them grow. Dubbed the Macmillan gap, this inability to bring together finance and industry was again exposed in the wake of the financial crisis.

Today, if there is an inefficiency in the market, there is a new wave of tech companies looking to address it. That’s exactly what’s happening with “FinTech” startups that have already disrupted the lending space in incredible ways.

Why lending?

The real opportunity for FinTech companies—not to mention small businesses—is in lending, not venture capital. Startups receive less than 1% of venture capital on offer in a given year, while many more small business owners seek a business loan to help them start or grow their business.

As a result, the market for lending to small business owners is massive, and as of today that market is largely still untapped.

As Harvard Business School senior fellow Karen G. Mills puts it:

“The smallest businesses who wanted the smallest loans were not being well served, in part because it was hard to know whether they were actually creditworthy.

The advent of technology and the entrance of new fintech entrepreneurs began to change that by improving the speed and ease of the small business customer experience, and making their financial activity more visible to potential lenders.”

This is all well and good for the entrepreneurs heading up the FinTechs. But what does their entrance into the space mean for lending as a whole?

How FinTech is changing the lending space

Democratizing access to capital

In the years following the financial crisis, banks tightened their already tight belts and were reticent to lend to small businesses as they tackled their own inability to stay solvent. As a result, a new class of online lenders emerged, seeking to extend financing to businesses that had no other options.

Generally speaking, more lenders in the small business lending space means more opportunities for small business owners to obtain loans. Some of these loans have high-interest rates and constricting repayment terms; others, based on strong financials from the business owner, are affordable and useful tools for growth or for covering cash flow shortfalls.

More specifically, new kinds of lending—peer-to-peer, crowdfunding, and short-term loans that take in a much wider swath of information than banks of years past—are more advantageous to traditionally underfunded populations, such as women business owners.

Overall, information is power, and the wealth of information now available to business owners on what they need to qualify for a loan, what makes a “good” loan, and where they can apply besides their local bank makes for a more equitable space.

Speeding up the application process

Even with this new class of online lenders, the best deal a small business owner can get on a loan will come from a bank. But sometimes the issue isn’t so much affordability as speed.

The underwriting process for a bank loan can take weeks or months. FinTech lenders, on the other hand, sometimes turn around an application and fund a business in as little as a single business day.

There are two clear benefits to a faster application process. For one, a small business seeking financing no longer has to tie up their time and resources in waiting for a loan response from their bank—only for the bank to reject them. With online lenders—many of which do a soft pull on credit to pre-qualify—a business owner can apply and move on quickly if necessary.

Secondly, some business financing needs are immediate. In case of emergency or great need—a disaster, an unexpected expense, a great bulk deal on inventory that is going fast—small businesses can’t wait weeks to hear back from a lender. Better to get their hands on working capital today and make decisions that can save their business than to drown.

Bringing traditional lenders and big tech companies into the fold

Banks and other big players have quickly realized that they don’t need to leave the small business market underserved.

Major global banks such as Wells Fargo and J.P. Morgan have started work on more tech-savvy lending solutions for their customers. Smaller banks have joined hands with FinTech companies to handle compliance and insurance issues. And major tech companies like Amazon and Square have also entered the space, offering loans and other forms of financing.

This proliferation of options will be a boon to small business owners, as competition drives down costs. It may also lead to increased regulatory oversight, which will make it more difficult for lenders to push bad deals onto business owners. The more mainstream and accepted the practice of applying for a loan online with a few clicks, the better.

This is an exciting time for small business owners and those involved in the lending space—and we’re just in the beginning stages. Expect FinTech companies to continue to innovate, using AI to determine which businesses are the most creditworthy; offering smart financial planning tools to small business owners to help them navigate cash flow and loan repayment; and other breakthroughs.

This innovation will inspire continued participation by legacy lenders and established small businesses alike—resulting in a win-win for the engine that drives our global economy—small business—and the financiers who fuel it.

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