How SME Lending From Fintech Firms Is Driving The Growth

April 11, 2017

How SME Lending From Fintech Firms Is Driving The Growth

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Even when consumer credit options have increased dramatically, and there are so many solutions available for them to purchase products and services, business credit and SME lending is still a major problem for many financially excluded start-ups and SME businesses.

According to a recent estimate, more than 200million small start-ups and companies worldwide do not have access to credit options or SME lending options available to them due to a variety of reasons. This has led to a credit gap of around USD 2 trillion of which the most affected happens to be the countries with a low-income level and a large number of start-ups.

The lack of start-up business lending has thus become a huge barrier for growth both for these start-ups as well as for the country as a whole because these SMEs account for almost 95% of all the global firms and have a considerable impact on the economic growth and employment levels at the global scale.

However, Fintech with the aid of technology and newer financial lending models has made a massive revolution in the start-up business lending. There is a survey which points that only in the year 2013-14, equity investments of Fintech firms grew from USD 4 billion to more than USD 12 billion Let us have a look at how Fintech has made this possible and see the changes it has brought about in the start-up business lending.

How SME Lending from Fintech Firms is driving the Growth

The financial institutions have to take into consideration the risk management guidelines, operating costs of credit and the high complexity of lending to such small scale businesses into account before financing for such companies. However, with a series of innovations and growth in the industry, a change was required in the traditional practices and principles involved in start-up business lending. Let us understand how Fintech has created a revolution in the way finance sector perceives start-up business loan and has managed to provide credit options to many start-ups and small-scale businesses.

#1 Advanced Analytics and Data sources

The biggest threat to traditional microfinance is data asymmetry. It is critical to disrupting the traditional ways of perceiving and analyzing data by finding alternative sources of evidence and means to look at it. With the advent of Fintech financing coupled with technical advancements and digitalization, there is an increased usage of transactional data, social media impressions and contractual details in analyzing the credibility of a company and assessing their repayment capacity. This makes it simpler to determine the best financing options and get insights of the business and its health.

Automation of underwriting and other financial paperwork

There is a drastic decrease in lengthy paperwork and underwriting procedures of the lending firms making SME lendingprocess simple and less time-consuming.This cuts a lot of overhead operational cost which in turn can reduce servicing cost and can allow a rate reduction for small businesses. The automation also enables the companies in understanding the repayment policies better. It is also observed that providing VAS and support along with financial aid can improve the bank revenue by 30%-50%.

Techniques like Crowd funding and Peer-to-Peer Lending

Fintech lead to growth in alternative business lending models like peer-to-peer funding and crowd funding which has taken the SME lendingto another level altogether. These have made access to credit less complicated to the SMEs and start-up firms thus bringing down the growth barrier. There is also an increase in prospective investors in P2P lending and crowd funding techniques.

Irrespective of the strategy involved, the primary focus was to bring down the growth barrier and help the SMEs and start-ups to get credit access. However certain risks like restricted protection of retail investors, funding to undeserving businesses, and those associated with an unregulated and opaque business sector persists and has to be dealt with carefully.

 

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