Fintech is a short form of financial technology. It’s a wave that has turned the financial industry services on its head. Developments in this space have gathered pace in recent years. PWC predictions for 2020 show a wave that’s not about to slow down anytime soon.
Nearly every facet of business has been a victim of this disruption: commerce, money transfers, mobile banking, insurance, stock trading, budgeting, to name but a few. Fintech has made inroads in the business lending process too. Software technologies and tech inventions like artificial intelligence (AI), progressive mobile and web apps, online business lending marketplaces, digital applications, and alternative credit data, have changed the way businesses access loans and funding.
Massive opportunities have opened up for small, medium, and large businesses due to these developments. Many of them are better off, thanks to the new lending environment.
How has Fintech transformed the business lending process? Let’s find out.
Fresh Alternative Lending Models
The age-old lending model where lenders would accept deposits from their customers so as to extend loans to their other clients is another victim of Fintech disruptors. In order to profit from this model, the lenders would charge borrowers more interest than what they would pay to savers.
Enter peer-to-peer lending, a model that eliminates the middleman from the equation. It replaces them with websites that broker the connection between borrowers and lenders. Examples include Upstart, Funding Circle, Prosper Marketplace, Perform, Lendingclub, etc.
Of course, they charge a small fee, but the upsides are plenty. Top on the list is that this model eliminates the traditional loan application process and cuts down the cost of borrowing. Also, important to mention is that there’s no deposit at all. Individuals simply earn interest by lending money to other individuals or to banks.
Alternative Credit Data
Initially, lenders would look at conventional credit bureau data to determine how likely the borrower is to pay back the loan. But Fintech lenders, like those who provide online loans, go beyond the traditional credit behaviours.
With alternative credit data, they get a comprehensive view of the borrower’s creditworthiness. It speeds up the scrutinization process as well and reduces overreliance on traditional credit scores.
In addition to utilities, auto payments, sales, PayPal and eBay data, Fintech lenders now incorporate data from Amazon, LinkedIn, Facebook, Yelp, among other sites. They also use insights from peer-to-peer lending. A few years ago, such data was barely available.
Lenders then analyze the data collected with the help of high-end technologies. Most of them can deliver the borrower’s creditworthiness profile within seconds. Eventually, the lenders get a stronger credit risk score. Borrowers, on the other hand, get a better chance to qualify for loans due to the availability of alternative credit data.
Unique Financial Products, Perks & Savings
Fintech has been an enabler of financial inclusion. It has spread the gains of economic growth to more sectors of the economy. Their first loan offerings were exclusive to businesses, but that has since changed. Fintech start-ups such as SoFi and Earnest, have stepped in to offer unique financial products. Part of that includes student loan financing, mortgages, and personal loans.
We also have Fintech lenders like FundBox, BlueVine, and Harper Partners who offer invoice financing. This is a lending option that lets you use unpaid invoices as collateral against loans.
Other unique financial products include business lines of credit and factoring loans.
And since a huge portion of the lending processes is automated, fintech lenders don’t incur expenses common to their traditional counterparts. Things like administrative expenses, rent, overheads, and so on have been completely eliminated. Thus, they are able to save huge sums of money and this enables them to offer borrowers competitive interest rates.
Speed of Loan Processing
Federal Reserve reports that the average small business owner looking to borrow a bank loan spends over 25 hours on paperwork. An online lender, on the other hand, can process a similar loan in less than 30 minutes. Lendit Founder Peter Renton actually notes that Kabbage (a Fintech lender) can process a small business loan in under seven minutes.
Also, compared to traditional banking, the details required to qualify for a loan from a Fintech lender range from little to none. Now combine that with automated checks and the artificial intelligence systems in place. You’ll clearly see why it’s possible to get approval almost immediately, with the money being available to you in less than three days.
Credit card providers would have come close, if not for the fact most of them take weeks to deliver that credit card to you.
Better Security Than Ever
Data privacy is a growing concern. Every person wants the assurance that their data is safe with the organization they choose to share it with. Fintech lenders have placed more focus on this and safety in general. For example, when checking data from third parties, most of them use tokens as opposed to extracting all the data and saving it.
In an effort to improve the safety of your data, Fintech lenders also continue to seek the guidance of federal banking regulators and the Consumer Financial Protection Bureau about the proper use of alternative credit data in arriving at loan decisions.
Meanwhile, this safety extends to fraud detection as well. With many lenders adopting sophisticated AI systems, that means they can detect fraudulent activities in nanoseconds. Even better, money transfer can be done within a few seconds, leaving no chance for the fraudsters to carry out their acts.
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There’s no doubt that Fintech is here to stay. Its impact on the various facets of finance and business will continue to be felt in the years to come. Case in point is what we have just discussed – business lending. Almost every aspect of it has been a victim of Fintech disruptors.
Fintech has been the much-needed sigh of relief, considering the complications and challenges presented by traditional business lending. As a small or medium business looking for affordable and easily accessible alternative business loans, you stand a better chance of success with an online Fintech lender – particularly those that have been around for a while and have earned a great reputation.