With the recent news online lending leader PayPal has issued more than $10 billion to SMBs via various business financing options since its 2013 launch, now is a great time to take a look at what lies ahead for the remainder of 2019 and beyond in the small business lending sector. So much continues to happen and 2019 may represent a turning point when it comes to the availability and ease with which SMBs can borrow money.
These changes couldn’t be happening at a better time, as a recent analysis from credit rating provider PayNet and financial research firm Raddon reports small business demand for loans has hit its highest level since 2012. The same study also claims that although all banks have reduced their small business lending activity since 2006, the major banks have pulled back the most.
PayPal’s announcement highlights the growth the fintech lending sector has enjoyed throughout the past several years. To put it in the simplest terms, traditional banks are rarely interested in providing loans under $800,000, yet most SMBs are typically looking for those in the $200,000 to $250,000 range. It’s no accident most of the loans comprising that $10 billion PayPal figure come from their Working Capital granting qualifying SMBs near instantaneous, interest-free loans of up to $200,000, with a flat-fee repayment as a percentage of daily sales.
PayPal’s success not only underscores the demand for SMB loans, it also highlights how fintechs have come to market with the right digital technology to service a need traditional banks had turned their backs on: fast, hassle-free, under $250,000 SMB loans. Fintechs are poised to continue taking this segment over—to the benefit of SMBs.
Diversify & Conquer
Another positive trend within the lending space is diversification of online lender offerings. Back when the fintech revolution started roughly a decade ago, these companies were essentially one-trick ponies. They all launched providing a single solution or service, such as invoice financial services, ways to streamline the mortgage process, or providing student loan help, as examples. We are now seeing many of the fintechs offering multiple services such as business bank accounts and credit cards customized to business owners specific financial profile.
This plan follows the fundamental rule for any startup: focusing on perfecting your core application prior to expanding your service offerings. In the fintech world, we are seeing that expansion happening now, and much of their attention focused on SMBs.
Eventual Implications of Blockchain
While it appears as though everyone is talking about blockchain, very few seem to have an exact understanding of how it works, despite its significant impact on the SMB lending space. An incorruptible, decentralized ledger, blockchain is creating new opportunities for funding, and essentially helping financial institutions make better lending decisions for SMBs.
"One of the keys to the success of blockchain is the secure environment the technology provides for the execution of digital contracts..."
One of the keys to the success of blockchain is the secure environment the technology provides for the execution of digital contracts, or so-called “smart” contracts. This digitalization of lending contracts in a far more secure environment enables lenders to validate transactions, verify legitimacy of the parties, and perform all the routine loan administrative tasks in a fraction of the time as normal. All this greatly accelerates the loan process and reduces costs.
With complete transparency such a necessity in the SMB lending space today, blockchain checks off all the boxes regarding how calculations are computed, and under what conditions they are triggered. The middleman is removed, and SMBs are directly connected to lenders.
The technology is only gaining steam. According to a 2018 report by research hub Research and Markets, global blockchain market size is expected to grow from USD $1.2 billion to $23.2 billion by 2023, with 80.2% Compound Annual Growth rate during the forecast period.
The next few years should be most interesting on the lending front for SMBs, and Original Funding is looking forward to helping business owners and entrepreneurs who need short-term capital find the right small business loan product. Find out more here.