How fintech has reshaped the business lending process
Fintech is a short form of financial technology. It is a wave that has upset the services of the financial sector. Developments in this space have accelerated in recent years. PWC Predictions for 2020, show a wave that’s not about to slow down anytime soon.
Almost every facet of business has fallen victim to this disruption: trading, money transfers, m-banking, insurance, equity trading, budgeting, to name a few. Fintech has also made inroads in the business lending process. Software technologies and technological inventions such as artificial intelligence (AI), progressive mobile and web apps, online business loan marketplaces, digital apps and alternative credit data have changed the way businesses access loans and finance.
Massive opportunities have opened up for small, medium and large businesses as a result of these developments. Many of them are better off thanks to the new lending environment.
How Fintech Has Transformed the Business Lending Process Let’s find out.
New alternative loan models
The age-old lending model where lenders accepted deposits from their clients in order to make loans to their other clients is another victim of the fintech disruptors. In order to take advantage of this model, lenders would charge borrowers more interest than they would pay savers.
Enter peer-to-peer lending, a model that takes middlemen out of the equation. It replaces them with websites that negotiate 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 benefits are numerous. Topping the list, this model eliminates the traditional loan application process and reduces the cost of borrowing. Also, it is important to mention that there is 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 data from credit bureaus to determine the likelihood of the borrower repaying the loan. But fintech lenders, like those who provide online loans, go beyond traditional credit behavior.
With alternative credit data, they get a complete view of the borrower’s creditworthiness. It also speeds up the screening process and reduces overreliance on traditional credit scores.
In addition to utilities, automatic payments, sales, PayPal and eBay data, Fintech lenders now integrate data from Amazon, LinkedIn, Facebook, Yelp, among other sites. They also use information from loans between individuals. A few years ago, this data was hardly available.
Lenders then analyze the collected data using high-end technologies. Most of them can provide the borrower’s credit profile within seconds. Eventually, lenders get a better credit risk score. Borrowers, on the other hand, have a better chance of qualifying for loans because of the availability alternative credit data.
Unique financial products, benefits and savings
Fintech has been a catalyst for financial inclusion. It has extended the gains of economic growth to more sectors of the economy. Their first loan offers were for businesses only, but that has since changed. Fintech start-ups such as SoFi and Earnest have stepped in to offer unique financial products. Part of this includes funding for student loans, mortgages, and personal loans.
We also have FinTech lenders like FundBox, BlueVine, and Harper Partners that offer invoice financing. This is a loan option that allows you to use unpaid bills as collateral against loans.
Other unique financial products include commercial lines of credit and factoring loans.
And because so much of the lending process is automated, fintech lenders don’t incur expenses common to their traditional counterparts. Items like administrative expenses, rent, overheads, etc. have been completely eliminated. Thus, they are able to save huge amounts of money and this enables them to offer the 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. In fact, Lendit founder Peter Renton Remarks that Kabbage (a fintech lender) can process a small business loan in under seven minutes.
In addition, compared to traditional banking services, the details required to be eligible for a loan from a FinTech lender range from little to nothing. Now combine that with the automated controls and artificial intelligence systems in place. You will see clearly why it is possible to get approval almost immediately, with the money available to you in less than three days.
The credit card providers would have moved closer, otherwise most of them take weeks to deliver that credit card to you.
Better security than ever
Data confidentiality is a growing concern. Everyone wants to know that their data is safe with the organization they choose to share it with. Fintech lenders have put more emphasis on this and security in general. For example, when verifying third party data, most of them use tokens rather than extracting all the data and saving it.
In an effort to improve the security of your data, fintech lenders also continue to seek advice from federal banking regulators and the Consumer Financial Protection Bureau on the appropriate use of alternative credit data to make lending decisions.
Meanwhile, this security extends to fraud detection as well as. With many lenders adopting sophisticated AI systems, this means they can spot fraudulent activity within nanoseconds. Best of all, the money transfer can be completed in seconds, leaving scammers no chance to do their thing.
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There is no doubt that FinTech is here to stay. Its impact on the different facets of finance and business will continue to be felt in the years to come. A concrete example is what we just discussed: business loans. Almost all of its aspects have fallen victim to Fintech disruptors.
Fintech has been the much needed sigh of relief, given the complications and challenges posed by traditional business lending. As a small to medium-sized business looking for affordable and easily accessible alternative business loans, you have a better chance of success with an online fintech lender, especially one that has been around for a while and has gained a great reputation.