Small businesses don’t have it easy, well most of the times. They often find themselves in a bit of a Catch-22 situation when it comes to finance. The challenge is that not many lending companies are willing to invest in a business that is yet to prove itself; and unless a business gets the requisite capital, it often finds itself unable to achieve all that it set out to do. However, all is not lost. The small business financing industry is seeing the entry of many innovative lenders who are revolutionising the SME lending industry and helping close the small business credit gap. And they are doing it through better business assessment and a greater price risk.
Read on to know what their challenges are and how they are being overcome.
- Acquire prospective customers faster
In the traditional lending business, new customer acquisition was a long-drawn process, requiring multiple visits and substantial time and effort investment. The gap between acquisition costs and returns on investment often made the idea of small business loans unappealing. The scenario is vastly different today. Lenders are able to connect with potential customers through non-traditional approaches that make acquisition faster and more streamlined, thus growing their loan portfolio rapidly. Assessment models are also different and it is easier to gauge the creditworthiness of a prospective client. Products and services, too, are not bound by conditions, but can be tailored around specific customer needs. Innovative lenders are targeting specific market segments instead of spreading themselves thin, while some are turning to the web or mobile as a means to reach customers.
- Improved underwriting
The SME market rarely, if at all, provides income tax records or any other form of verifiable data for a business to establish its credibility. In the absence of this, traditional lenders are averse to take a decision in the favour of an SME loan. Also, often the small size of the loan makes it a financial liability to carry out diligent checks using third party investigators. Innovative lenders turn to their in-depth market knowledge to gauge trends of the borrower’s industry and the borrower’s prospects. Many lenders apply their own algorithms that can generate credit assessment for each SME loan applicant.
Innovative FinTech companies understand SMEs because they too encounter the same challenges that their customers face: finding investors and funding clients with a similar bent of mind as theirs, someone who can match their appetite for ground-breaking ideas and non-traditional approaches. The business has now developed its own set of tools and strategies for connecting boutique financing companies with investors, thus ensuring funding for its customers. What these unique solutions are doing is creating a whole new world of small business loans that was hitherto limited by traditional banks, government regulations and a reluctance to finance unconventional businesses.
These innovative solutions are closing the small business credit gap and are supported by changes in technology, relaxation of strict government regulations and a more supportive environment that encourages new thinking.
FinTech is the future of financing and the sooner businesses embrace it, the better.