Author: Matthew Wilde
Ever notice the bass guitar when you’re listening to a song?
Probably not, right?
Chances are it’s the flashy lead guitar solo that grabs your attention. Or a drum flourish. Or the singer’s vocal acrobatics. Meanwhile, the bass guitar sits in the background, doing its job without getting much attention.
But take it away, and everybody notices. Without the bass guitar there’s no groove. No weight. The sound feels hollow somehow.
SMEs are a bit like that.
Fortune 500 companies tend to hog the limelight. But it’s SMEs that do most of the economic heavy lifting. The US Small Business Administration reckons the vast majority of US companies—99.7%—are SMEs. Together, they account for 63% of new job openings nationwide.
Yet, despite making up an overwhelming chunk of US business, access to traditional funding is still a challenge for many SMEs. In 2018, loan approvals from big banks were the highest they’ve been in 7 years. But, at 25.9%, that’s not especially high. It means big banks still decline 74.1% of applications.
As it happens, this massive gap is big banks’ loss and fintech’s gain. By combining financial know-how with technology, fintech is reshaping SME lending, approving loans to more businesses more quickly, and giving more SMEs access to the funds they need to expand.
Here’s a look at 7 fintechs that are transforming SME lending, how they’re doing it. and the steps they take to keep the risk of bad debts in check.
Founded Down Under in 2004 and backed by Atlassian co-founder Mike Cannon-Brookes, Tyro isn’t only a lender. It’s also a fee-free, interest-bearing business bank account and an electronic funds transfer at point of sale system (EFTIPOS) with over 260 integrations.
Tyro’s unique selling point is that there’s no application process, no documentation to submit and no interest. That’s right, no interest. Instead, businesses are charged a flat fee, which they’ll pay over the life of the loan.
SMEs can get access to funds in as little as 60 seconds. And, even better, repayments are flexible. SMEs can skip a month if business is slow, as long as they repay an agreed minimum every 90 days.
Tyro loans are unsecured. That said, applicants will need to provide a personal guarantee. They also can’t borrow unless they’re a Tyro EFTIPOS customer. This is because Tyro’s app assesses the applicant’s eligibility based on the transaction history they have on file and collects repayments by taking a percentage of the EFTIPOS takings.
Prospa made Deloitte’s 2018 Technology Fast 50 Australia Awards. It offers small business loans of up to $250,000 with 3- to 24-month repayment terms and has lent businesses $920 million over the last 6 years.
It takes about ten minutes to complete Prospa’s online application. Businesses will need some basic financial documents such as a profit and loss account, and cash flow statements to apply. But if you want to borrow $100,000 or less, your driving license, Australian Business Number and business bank details are enough.
Getting approved is equally quick. Applicants can expect a decision on the same day they apply, possibly even within an hour, and will be able to access funds in as little as 24 hours.
The system works so quickly because Prospa’s technology can verify your bank information in real time—applicants can upload their bank statements manually if they prefer, but why would they do that?
Fundbox can make lending decisions in under three minutes. It also has the simplest and quickest application process:
- SMEs connect it to their accounting software or business bank account
- The system will use the data to calculate how much they can borrow
- That’s it. No paperwork. No collateral. And not even a credit check. If approved, businesses typically get the funds within 24 hours
The system works because Fundbox lends money against unpaid invoices. But unlike traditional invoice factoring, Fundbox doesn’t take over the relationship with the debtor. The borrower simply pays back the loan once the invoice payment clears into their bank account or is recorded on their accounting software.
Founded in 2007, OnDeck has lent $10 billion to businesses across the world. Its technology also powers JP Morgan’s online small business lending platform.
OnDeck offers two types of loans: fixed term loans of up to $500,000 and lines of credit of up to $100,000. It takes 7.2 minutes on average to complete the application. But if an online form isn’t the applicant’s cup of tea, they can also apply by phone.
OnDeck’s loans are secured against the business and also require a personal guarantee. That said, the lending decision is based on the business’s overall health. SMEs don’t have to have specific assets they can put up as collateral.
5. Funding Circle
Funding Circle specialize in peer-to-peer lending. Over the past 8 years, they’ve matched investors to 62,000 small businesses around the world and approved $8.6 billion in loans.
Businesses can complete an application online in 10 minutes with minimal documentation and will typically get a decision in 24 hours. Yet, despite approving a new loan every five minutes, Chief Risk Officer Jerome Le Luel has said average risk on Funding Circle’s whole book is about 2%.
So how is this possible?
Firstly, businesses are prequalified at application stage, which speeds up the process. As a rule, Funding Circle lend to established businesses who’ve typically been active for 10 years or more.
Secondly, while there’s no need to submit a business plan or make a presentation, there’ll be rigorous credit modelling and a review by an experienced (human) credit assessor. Loans are also split across several different investors to spread risk.
Lastly, those who own at least 20% of the business have to personally guarantee the loan.
6. Capital Float
Founded in Bangalore, India’s third city, Capital Float is backed by $22 million in C series funding from none other than retail behemoth Amazon.
Like Kabbage, Capital Float started out servicing merchants in India’s booming e-commerce industry. It now specializes in working capital for both online and offline merchants, including term finance, supply chain finance, and cash advances.
Businesses can apply online in 10 minutes, provided they’ve been in business for at least a year. The decision is instant and they’ll typically have the funds in hand within 72 hours, without having to put up any collateral.
What’s interesting about Capital Float is that, alongside credit scoring, customer feedback, and other online data, the decisioning process includes a psychometric assessment. Attitudes to credit and the ability to scale business are evaluated and compared to those of industry competitors. And this helps give a broader view of an applicant’s suitability and the level of risk they pose.
Like Funding Circle, Kabbage is a digital lending veteran. But Kabbage started off with a much narrower niche—online merchants who sell on eBay, Etsy, Amazon, and other online stores.
Nowadays, Kabbage specialize in SMEs that have trouble getting funding from big banks, either because they’re too small or because their credit history is less than perfect. As an automated lending platform, they can process applications and make decisions in as little as 10 minutes.
But how do they keep risks in check?
While credit score is taken into account, Kabbage’s algorithm—developed in conjunction with credit-scoring giant FICO—considers 30 data points. These include cash flow and business performance. The algorithm can also learn from historical data. Which means it becomes more effective at predicting risk over time.
Bonus Round: US Bank
US Bank may not be a fintech, but their recently launched SME lending platform aims to take a similar approach, bridging the gap between fintech and traditional lending. As U.S. Bank Business Banking Experience Studio executive Scott Bayer put it:
“We were striving not to compete with traditional banks but to compete with and leapfrog the fintechs.”
Getting a business loan used to entail forests of paperwork, business plans and several months’ wait for an appointment just to discuss an application. But fintechs have made it possible to get funding in minutes, with a few swipes on a phone. Unsurprisingly, they’ve become a force to be reckoned with in the SME lending space.
In 2017, fintechs were the third largest source of SME funding in the US, accounting for 24% of all business lending. And this has forced banks to finally sit up and take notice.
As US Bank’s foray into the digital lending space shows, the challengers may soon find themselves challenged. But if it serves to make getting a business loan even simpler and faster, we bet SMEs aren’t going to complain, are they?
Are there any other fintechs you think are making their mark on SME lending?
"Provenir's no-code visual tools let us design and configure our business process and go live quickly" Michael Gramz, Chief Risk Officer, Yapstone
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