To say the last decade has been an eventful one for small business owners would be a gross understatement. As the U.S. economy teetered on the brink of collapse, no sector felt the wrath of the 2008 financial crisis more than small and medium-sized businesses (SMBs). More than a decade later, rumblings are still being felt, particularly when it comes to securing a loan.
Despite the fact the approval percentage for small business loan applicants hit a record high of 27.5% at big banks in May 2019, according to the Biz2Credit Small Business Lending Index, a monthly analysis of recent loan applications, that still means almost three-quarters of all SMB loan applications traditional banks receive are being rejected.
Alas, there is a ray of hope on the horizon with regard to SMB lending. Call it “Lending 2.0,” as the fintech effect is changing the lending landscape on several different levels. The emergence of artificial intelligence (AI) and machine learning are dramatically improving the SMB lending process, and the ricochet effect all this change is having on how traditional banks handle SMB loans could spell good news for this segment.
Looking at the fintech side of the equation first, these online lending companies began bursting onto the scene shortly after the 2008 economic meltdown with the mission of disrupting and reshaping commerce. Roughly a decade later, it’s mission accomplished, and fintechs are turning even more attention to the SMB market in the United States.
A quick look at a few fairly startling numbers, courtesy of alternative finance publishing and event company DeBanked, sheds some light on the exact impact fintechs are having on SMB lending. In 2018, two of the bigger online lenders, Kabbage and OnDeck, lent $2 billion and $2.5 billion, respectively, to SMBs, while online lending leader PayPal hit the $4 billion mark. And with the fintech ecosystem continuing to grow in the lending sector, these numbers are likely to be eclipsed in 2019.
Streamlining the Loan Process
Fintechs are clearly ushering in the dawning of a new era through the use of AI and machine learning, redefining the lending business. The big fix here is that traditional loan processes are simply taking too long, and are typically fraught with inefficiencies. Digital lenders are using the aforementioned tech to hasten the process, by reducing the steps needed to complete the application, and greatly speeding up approval processes. This is all music to the ears of SMBs.
Zeroing in on machine learning to more clearly illustrate what fintech is bringing to the table, the loan process involves many variables regarding the different criteria borrowers need to meet. The amount of information tracking that goes into each application is extremely time-consuming, and puts limits on the extent to which most traditional banks will invest in this process.
With machine learning, the computer is constantly figuring out a better way to do this research with every loan, gathering and interpreting the data more efficiently and more effectively—in essence, learning and improving its predictive abilities throughout the process. The lender can stay one step ahead, while the borrower ultimately reaps the benefits of this streamlined approach.
Again, we turn to some numbers from Biz2Credit to highlight the impact fintechs are having in the SMB loan space, as alternative lenders are now approving 57.2% of small business loans through April 2019, compared to the 27.5% figure cited earlier for big banks.
The aforementioned ricochet effect comes in the form of the realization from traditional banks that they have to start playing in the same sandbox with the fintech firms. The activity on the partnership front has been robust, with the bigger bank/fintech unions in the last year being OnDeck/JPMorgan Chase; Kabbage/Scotiabank and Keybank/Bolstr, to name but a few.
This collaborative spirit is likely to gain steam moving forward. According to a recent PwC Fintech Report, 82% of banks in the industry expect to increase fintech partnerships in the next three to five years.
Powering the U.S. Economy
The interest from fintechs in the SMB loan space is certainly no surprise when you consider there are roughly 27.9 million small businesses in the United States. Equally impressive is the fact that those small businesses contribute collectively roughly 46% of the nation's Gross Domestic Product, according to the most recent figures available.
Bob Dylan once sang “The times they are a-changin’,” and that holds particularly true in the lending world today, with capital flowing, a solid economy, and the willingness to lend on the part of financial institutions, both new and not so new, on the rise.
Lack of available funding is no longer a barrier to your ability to take your business to the next level. Original Funding has the roadmap for the capital you need, with flexible debt consolidation loan options and multiple ways to help you qualify. To learn more, start your application, or contact us to speak with a loan specialist today.