Financial technology, or fintech, has revolutionized the lending industry. Fintech startupsmade a splash in the business world in 2015 by disrupting the traditional financial services sector. Fintech companies, including alternative online lenders, are transforming the industry and making it easier for small businesses to obtain adequate funding and operate efficiently. There are many ways that fintech supports and benefits small business owners, especially when it comes to funding growth.
What is Fintech?
After the 2008 financial crisis, entrepreneurs saw an opportunity to overturn traditional banking and lending services. Fintech companies started to emerge, including payment processing firms, alternative lenders, wealth management services and cryptocurrency. These fintech organizations use an online and digital-based approachthat makes it easier for small businesses to send and receive funds and help entrepreneurs access the capital they need to grow their businesses.
Fintech has transformed the way that small businesses get funds. The financial crisis made it especially difficult for small businesses to secure adequate financing from mainstream banking institutions. This meantthat a number of entrepreneurs were not able to fund their startups. Similarly, many small business owners could not get the financing they needed to grow their businesses. When mainstream lenders were unable or unwilling to meet the needs of small businesses, alternative lenders stepped in to create new opportunities for the small businesses in need of funding.
How Fintech Benefits Small Businesses
Fintech firms can offer many benefits for small businesses that are in need of capital. One major benefit is that these lenders can more easily determine a small company’s ability to repay the loan. Many traditional lenders have a hard time accessing credit risk for new and small businesses. Each small business is distinct, even those that are in the same industry. This makes it challenging and expensive to consistently monitor small businesses with variable cash flows and unique needs. However, fintech firms access and use a variety of real-time data online, making it easy for them to make a loan decision in a matter of moments.
Another major benefit of fintech companies is their flexibility. Based on information from a Harvard Business School report on small business lending, banks are more likely to deny small business owners a traditional loan if it is less than $250,000, if the individual has been in business for less than 2 years or if their credit score is less than 640. On the other hand, alternative lenders are a bit more flexible in their credit decisions because they are using actual business data and can offer different amounts and terms that fit each small business’ individual needs.
How Technology Supports the Lending Process
With payment processes like Square making it easier for small businesses to receive money, it should come as no surprise that fintech firms have also found ways to use technology to create a more efficient and effective lending process. Here are just a few ways that technology supports small business lending:
• Quick credit decisions. As previously stated, alternative lenders use real-time data to more accurately determine a business owner’s ability to repay loans. By connecting the business owner’s financial accounts like online banking or PayPal, alternative lenders are able to effectively make a decision in a matter of moments.
• Convenient access to funds. Whereas traditional banks may have a lengthy decision process and take even longer to deliver the funds, alternative lenders allow small business owners to access the funds quickly and conveniently through their online platform. This means that users can get the funds they need, when they need it, no matter where they are.
• More options for lending. No two small businesses are exactly alike and neither are their funding needs. Alternative lenders offer more options for small businesses who have particular needs. For instance, some lenders offer loans as small as $1,000 while others provide a revolving line of credit for businesses that have ongoing capital needs.
• Easily compare lenders. Now, entrepreneurs can easily compare options for alternative lenders online. This allows small business owners to conveniently get competitive rates and it empowers business owners to make the best decision for their business.
Fintech organizations have already created so many opportunities for entrepreneurs who need to fund their startup and for small business owners who want to grow their business. As these firms continue to find new ways to improve small business processes through the use of technology, it will be exciting to see what is on the horizon for fintech.
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