Starting and running a small business can be a mammoth task, mostly due to the cash flow challenges micro-entrepreneurs face along the way. Research says about 82 per cent of small businesses fail due to poor cash flow management or lack of adequate skills to manage cash flow.
Any business starts with an idea that fills a gap in the market. An entrepreneur with a specific skill set uses their skill to provide a service or product offering to the market to fill this gap. However, financial management might not be a skill in their portfolio. And many a time they don’t even have proper funding to back the many expenses that go into establishing a new business.
Entrepreneurs are riddled with issues, such as:
In this article, we look at fintech’s role in changing how small businesses are managing their cash flow challenge and the many fintech funding/lending tools that entrepreneurs can choose from.
The many facets of Fintech and their impact on small business
Fintech industry uses disruptive technologies such as AI and ML, to help individuals, as well as, organizations manage finances efficiently. So, whether it is a particular set of tools such as earning calendars, global payments systems, cybersecurity software or payment automation; or fintech lending tools that help entrepreneurs access the funding that will help them grow and expand, there are multiple ways in which fintech is providing the thrust that small businesses need to grow and expand.
The fintech industry has grown manifold in the past decade with the total value of Fintech investments worldwide pegged at an all-time high of USD 33.9 Bn. This has led to more fintech firms pumping in new and better lending solutions into the fintech lending market. With better automation, speed, accuracy, and choice of lower interest rates for customers (both B2B and B2C) the alternative lending scenario has evolved manifold in the past few years. As such, the industry is seeing a burgeoning number of small business lending platforms.
Small business owners are now aware of the fact that they don’t need to depend on traditional lending methods and community banks alone, to support their growth and expansion plans.
Here’s a look at some of how Fintech lending is helping small businesses manage their cash flow challenges.
Fintech is all about handling finances more efficiently. There are always parties (VCs, investors, P2P lenders, community lenders) who have access to excess funding and are looking for avenues to invest this excess in hopes of better returns than standard interest rates. On the other hand, there are other parties (such as small business owners) who are looking for lenders willing to lend the sum required at competitive interest rates and with lesser hassles involved as compared to traditional banks.
To democratize lending Peer-to-Peer (P2P) Lending came about. It addressed the above-mentioned issue perfectly by providing a platform for cash-rich people to direct their savings into areas where they are needed more. P2P lending comes sans issues of lengthy paperwork, complete with quick disbursals, and easy repayment modules that do not attract any penalty on early payments. In short, it is an extremely easy way for small businesses to fund their cash flow requirements in a jiffy, using fintech-powered small business lending software.
Fintech lending earns yet another big point given the fact that most fintech loans are soft pulls as compared to the usual hard pulls provided by traditional banks. With soft pulls, microentrepreneurs can remain free of worries about their loans affecting their credit rating. Fintech helps lenders conduct background checks faster, more efficiently, and accurately, thus making the loan origination process quicker and more effective for borrowers.
B2B lending works much like P2P lending. Both methods cut intermediaries, thus making loan origination a more cost-effective and efficient process.
Factoring: The Fintech boon for small businesses
Invoice trading or invoice factoring help small business owners who are constantly fighting the 90-day invoice payment window to stay afloat. Accrued receivables can, many a time, spell doom for small businesses as not receiving payment on time can lead their working capital to take a hit, and in the long term bring the business to a standstill.
Through invoice factoring, small business owners can sell their accrued receivables to fintech lenders in exchange for a small fee. In essence, they receive the amount accrued at the right time, by forgoing some of it in the form of a fee. Lending companies assume the risk of the accrued receivables in exchange for the fee and realise the invoices from the customers of the small business.
Yet another popular method of fintech lending is crowdfunding. This one of its kind form of financing products and services has led to the establishment and growth of many successful startups such as Pebble ($12.8 Mn), Misfit ($40 Mn), Formlabs ($2.9 Mn), among others. There are multiple crowdfunding and small business lending platforms that host crowdfunding requests.
The best part about crowdsourcing platforms is that not only do they help entrepreneurs raise early-stage finance, they also help them connect with a community of potential customers and help them reach a market where they can beta-test and validate their project idea and also create a loyal community who appreciate their offering from the very beginning.
On the other hand, where SME startup loan is required, fintech lending in the form of equity-based crowdfunding can be helpful. In this method, small businesses approach angel investors, individual investors, and venture capitalists to source funding for their company, in exchange for part of their company’s equity.
In equity crowdsourcing, too, small business owners tend to gain more than just financing from their investors. They also gain knowledge and expertise, along with assistance from dedicated teams (marketing, logistics, finance) of the investors. The investors too, because of their vested interest in the company doing well, extend advice and support to the small business owners to ensure they do well, and the company grows and expands in the long term.
Overall, fintech lending has come a long way since its inception. It has changed the business landscape worldwide by providing small and medium businesses and startups the impetus they needed to create, innovate, grow, and expand. Without innovation the world comes to a standstill and fintech lending while evolving and innovating in its industry, has helped the rest of the world move forward as well. Fintech lending is set to become the future of lending whereby smooth and efficient cash flow would become the hallmark of the industry.