Peter runs a ‘Mom and Pop’ store in a small town in Texas, which caters to town’s day to day needs. Last December, he had an opportunity to grow his business on the occasion of Christmas festive season; he needed access to quick funds. While Peter turned to traditional financial institutions to get loans, he was unhappy with the long-drawn process from application submission to application review, taking weeks to complete and hence made Peter let go of this opportunity. There are numerous such instances in the lifecycle of business where inadequacy of funds hinders growth and threaten the day-to-day operations.
An unsecured business loan at right time can help SME’s to take care of routine business expenditure and can be useful for business expansion activities. Traditional financial institutions adopt a cautious process when make small-unsecured loans and moreover they prefer loans only against collateral. So there is a greater need for adequate financial support for small and medium enterprises.
Sensing the opportunity, Fintech lenders have come up with a hassle-free process and innovative products to attract new customers, thereby challenging offerings from traditional financial organizations. Alternative lenders with their Fintech softwares has created an ecosystem where these innovative products reach customers via cost-efficient digital channels. Alternative lenders have atomized lending by introducing customized loan products for each of the business needs, such as:
Term Loans: Loans for businesses in operation for 2-3 years, doing good turnover and seeking funds for their growth. The amount varies from $1,000 to $100,000.
Line of Credit: Credit for businesses in active operation, seeking funds for their working capital and their operations. A line of credit is offered and the borrower can make as many draws depending on their requirement.
Merchant cash Advance: Retail stores and restaurants who receive a bulk of their payments through card purchase/ online purchases can take a loan up to 200% of their monthly receivables. These loans have flexible payment schedules.
Online seller Finance: Designed specifically for e-commerce sellers, in which borrowers can take up to 200% of monthly sales volume as an advance loan.
In addition to innovative products, Fintech firms have also come up with seamless processes for effective lending. While traditional organizations evaluate balance sheets, P&L statements and other documents of the business, Fintech platforms use AI and advanced machine learning algorithms to rate the SME’s creditworthiness. Fintech platforms lay specific importance to digital data available in an ecosystem like bank transactions, cash flow, and importance is given to company ratings from credit reporting agencies. Fintech platforms collate all this information and draw up algorithm-based scores on each application hence the offer is made to the borrower in lesser time at the same time ensuring NPAs remain exceptionally low. This is made possible by using cost-efficient infrastructure and emphasis on cloud capability and analytics.
Fintech lenders have a human-centric approach to lending, contrary to a time-consuming cumbersome process by traditional lenders. Fintech lending firms have designed the entire process focusing on the customer and their needs.
To start with, SME’s can apply for business loans anywhere through any device and at any time. They need not carry heaps of physical documents to any branch; rather they can upload minimal documents at their convenience.
As underwriting depends on business need and product, Fintech firms employ smart algorithms to read through data from various sources such as cash flow, net earnings, the background of owners, location and other factors and determine creditworthiness within lesser time.
Fintech firms do not take a long time to disburse approved loans and there are no prepayment penalties, unlike banks. These unsecured loan costs can be further brought down if the borrower selects a right product and takes up flexible repayment plans.
The ability of Fintech firms to understand customer needs precisely and offer quick loans at competitive rates draws SMEs towards them. These firms act as a partner to the business with their ability to offer competitive service offerings compared to traditional lenders. Customer-centric innovation triggered by Fintech firms is here to stay and well received by SMEs around the world. How the traditional lending institutions will act against this threat and innovate to come up with a new plan is something to wait and watch.
LendFoundry is a next-generation, end-to-end lending platform based on cloud which empowers business lenders to deliver business loans with speed & efficiency through its 50+ pre-configured, out-of-the-box APIs with major FinTech platforms. It has the ability to digitize and accelerate entire loan lifecycle of any alternative lender.