To say the past year—even the last few weeks—has been eventful for small business owners would be a gross understatement. As the U.S. economy continues to grapple with the unprecedented instability caused by the novel coronavirus (COVID-19) pandemic, no sector has felt its wrath more fiercely than small and medium-sized businesses (SMBs). Nearly 100,000 establishments that temporarily shut down due to COVID-19 have gone out of business permanently, according to a September 2020 article in Forbes.
Rumblings are still very much being felt, particularly when it comes to securing a loan—and it’s getting worse.
A quick look back at 2019 underscores the severity of 2020. Despite approval percentages for small business loan applicants hitting 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, it still meant nearly three-quarters of all SMB loan applications received by traditional banks were being rejected.
By September 2020, those proportions had plummeted to even further depths, continuing their dismal downward slide, from 27.9% a year earlier to just 13.5%—further indication of the many struggles faced by small businesses, reports that month’s analysis. Alternative lenders, it states, were at about 23%. Its November index reported ongoing turmoil for big bank loan approval rates, reporting further slippage to 13.2%, yet a slight increase for fintech lenders, at 23.4%.
Alas, there is a ray of hope on the horizon with regard to SMB lending. Call it “Lending 2.0,” as the fintech effect has been 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 financial crisis melted the global economy, with the mission of disrupting and reshaping commerce. More than a decade later, fintechs are turning even more attention to the SMB market in the United States—with COVID-19's economic destruction merely underscoring their critical roles as vital financial lifelines.
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, for example, 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 the fintech ecosystem has continued to grow in the lending sector, made even more evident by fiscal chaos caused by the deadly COVID-19.
Non-bank and fintech lenders played significant roles in helping the U.S. economy—and small businesses, particularly—survive the COVID-19 downturn, as companies across a wide swath of industries locked down and shed workforces.
For the first time, the U.S. Small Business Administration (SBA) authorized fintech lenders to fund critical Paycheck Protection Program (PPP) loans, providing vital financing to help small businesses across the country weather COVID-19’s economic wrath.
Lendio, the largest loan marketplace within the United States, for example, approved a whopping $8 billion in PPP loans through its platform. Through its more than 300 lenders—traditional banks, non-banks, credit unions, fintechs and nonprofits—an estimated 1.1. million jobs were saved in the process, according to an August 2020 report it published.
Fintech lenders “delivered on serving the smallest of small businesses and sole proprietors,” states the analysis, securing more than 18,000 loans representing 16% of all businesses receiving approvals, and averaging $28,584.
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 limits 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.
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 bigger bank-fintech unions including such big players as 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 2017 PwC Fintech Report, 82% of banks in the industry expected to increase fintech partnerships within the following three to five years.
The interest from fintechs in the SMB loan space is certainly no surprise when you consider there are roughly 31.7 million small businesses in the United States, employing 60.6 million people, according to the SBA Office of Advocacy’s “2020 Small Business Profile.” Equally impressive is the fact that those small businesses contribute collectively roughly 44% of U.S. economic activity, according to its “Small Businesses GDP, 1998-2014,” which provides the most recent figures available.
“Small businesses are the lifeblood of the U.S. economy: they create two-thirds of net new jobs and drive U.S. innovation and competitiveness,” it reads.
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