Though technology is often associated with being impersonal, quality online lenders go the extra mile to give personal service! As alternatives to traditional banking, and traditional application processes, they also have many advantages for small business owners looking for financing in their growth years.
What is a fintech lender?
Simply put, a fintech is a financial institution that uses technology to help its customers. This often means that all or part of their application can be completed online. Technology is often used in different ways behind the scenes as well, to evaluate the application, gather information, deploy funds to the customer, and help the customer make payments.
Fintech lenders have many benefits for small business owners. The innovation built into their business models make them flexible, forward-thinking, and fast. While banks do use technology, fintech lenders are non-depository institutions, or non-bank lenders, which brings additional advantages.
Technology helps small businesses access the funds they need to grow.
- Convenience – When an application can be completed fully online, applicants are not constrained by business hours. In fact, at Lendistry we’ve observed that the typical small business owner with under ten employees signs on to work on their application late at night. An online application is a particular advantage in underserved business communities where a lack of physical branches is a significant hurdle.
- Flexibility – Fintech lenders, because they are not banks, work with fewer regulations and constraints. This makes their requirements easier to manage for a small business owner with less experience applying for a loan. It also enables the lender to offer more flexible terms and repayment plans.
- Earth-friendly and paper-free – A digital application process takes away the need for documents to be provided in paper form. Third-party digital services are often brought into the process to provide secure financial statements, background checks, and even signatures.
- Speedy application process – If you have the required financial information available, an initial application through a fintech lender can be submitted in one sitting.
- Speedy processing – Due to the automation made possible with technology, prequalification and many underwriting steps are much faster, which means less waiting for the applicant. This doesn’t mean there isn’t a human touch! A quality fintech lender has real professionals overseeing the process and available for questions and updates.
- Lower loan amounts – Every loan a lender processes comes with operational costs. That’s one of the reasons why traditional banks offer fewer loans in amounts counted in millions. Fintechs have much lower operational costs associated with every loan, which means they can offer a high number of loans in lower amounts. This is a big deal for growing small businesses who need more financing than a credit card will cover, but much less than the minimum loan amount at a traditional bank.
- A variety of financing choices – With non-traditional lenders come non-traditional loan products. The flexibility of fintechs give them the ability to innovate and offer more options that better fit your business’s needs.
- No need for a bank – Many individuals and business owners prefer an alternative to working with a bank. There are fintech institutions to support their checking and savings needs, but many apps and depository fintechs don’t offer loans. Fintech lenders fill that gap. Small business owners can even access SBA 7(a) loans without a bank by working with a fintech that is also a Small Business Lending Company (SBLC).
- A pathway to traditional loans – Fintech lenders offer small business owners with little or no credit history a way to grow. As customers pay their loans, they increase their credit profiles. Over time, smaller loans and refinancing debt can lead to larger loans and larger purchases, including commercial real estate. This growth increases the business’s footprint until the it qualifies for larger, traditional loans.
- Equitable access to capital – A 2021 NYU study proved that non-depository fintech lenders were the most effective at deploying PPP funding to Black-owned businesses. This is partly because of the lower loan amounts and convenience of an online application mentioned above. But they also had to unexpected advantage of removing human biases from the decision-making process.
Be careful to avoid predatory lenders
Predatory lenders are very active in the online lending space. These are lenders that target young businesses with promises of fast funds. Customers who take their offers end up taking on small loans with interest rates in the triple digits, owing tens of thousands more than they borrowed. A preposterously high interest rate plus a prepayment penalty ensures that borrowers pay off the original amount quickly but still owe payments for several years more.
While some states govern payday loans and impose interest caps on certain small installment loans, these predatory loans are entirely legal. Do your homework before choosing an online lender to ensure they’re reputable and responsible.