As a business owner, you will most likely want to apply for a commercial loan at some point. Small business lending helps companies manage working capital to make sure they have the resources to grow while still paying their monthly bills. Almost as important, borrowing and managing funds can help small and startup companies demonstrate their creditworthiness to make sure they have access to funds in the future when they are needed. Very often, it’s better to obtain business loans sooner rather than later.
Surprisingly, a large percentage of small and new companies get financed out of their owner’s pocketbook. The company’s founder might not have established credit in the company’s name yet. He or she might believe that applying for credit from a traditional lender will just waste time. Besides that, the process of applying for traditional bank loans can be onerous; typical banks don’t move swiftly for new borrowers, and they usually require reams of documentation. Rather than suffer through a long process just to get turned down, many business owners simply did without.
How Financial Technology Has Changed Business Lending
Financial technology, often called fintech, is beginning to change the way that many entrepreneurs feel about obtaining business loans. Consider some statistics about the growth of fintech and small business lending:
- Each year, investment in financial technology has increased by 45 percent.
- Startup companies received $13.7 billion in loans thanks to the advancements in fintech.
This kind of technology allows progressive lenders to move very quickly and very often, say yes when traditional lenders would have said no. Indeed, using financial technology to enable online loans has allowed many platform lenders to offer immediate, online approvals and rapid funding. Instead of waiting weeks, companies can have their approvals instantly and their funds within days, hours, or even minutes.
How Has Financial Technology Helped Advanced Business Lending?
Banks and other traditional financial companies tend to rely upon typical credit scores. Very small companies may have run well for years, but never sought credit before. Thus, they may not have established a good credit score. This doesn’t mean they are not good businesses though. Similarly, startup companies haven’t even had a chance to establish their own credit, so they had a tough time proving creditworthiness under the old model. These startups may have a sound business plan but simply lack a track record of repaying loans.
Online lenders can use different information to determine how much money to lend to applicants. For example, they may pull information from real-time data sources like PayPal, eBay, Amazon, and even social networks. This data can help the lenders truly analyze a company’s revenues and visibility in a way that traditional credit scoring cannot. Better yet, this model allows online lenders to grant loans to companies that might not have even tried to borrow in the past.
Fintech Helps Small Business Owners Obtain Financing and Build Credit
Using technology to approve and fund loans can offer businesses another benefit. Financial technology and online lending platforms can operate more efficiently than brick and mortar banks. This means that companies should find that loans are much more accessible and also cheaper than they were before. Online lenders can profit on smaller margins, so they can pass savings on to attract more borrowers.
At the same time, good management of these loans can help small companies and startups demonstrate their good credit management skills so they will have more ways to borrow in the future. The rise of online lenders has not eliminated business loans from traditional banks. In fact, some banks have even partnered with internet lending platforms to fund loans. The rise of online lending will not end banks. It will simply give business owners faster, more accessible, and in some cases, cheaper options.