While there are certainly different interpretations of what a microcredit is, in the most basic terms it is a smaller loan typically used to help you grow your small business. Microcredit is changing the way small businesses finance their growth and continued success. Micro-loans also help strengthen communities and local economies by supporting families and creating jobs.
In banking terms, micro loans are very small loans ranging from $ 500 to $ 100,000. In general, many banks stopped processing microloans because they were not profitable to them. However, fintechs have come up with innovative ways to help small businesses finance their growth while still making a profit by providing these small amounts of loans. FinTech influences the lending industry in different ways.
The main disruptive factor driving the rise of FinTech in the lending industry is its ability to deliver high quality service effectively and efficiently on a smaller scale. In the short-term loan industry, some fintech companies provide clients with apps, where clients can apply for a quick loan right away and get cash instantly. For example, the The Kabbage app offers a quick and easy way to raise funds to grow your business. The financial technology company can deliver up to $ 100,000 in just seven minutes via a mobile phone.
Small businesses today have access to unsecured loans, thanks to fintech. Traditionally, for small businesses to get a loan from a bank, they had to post collateral. Many small businesses have a constant cash flow but no tangible guarantee. Since fintech lenders do not ask for collateral, many small businesses can now access loans.
Additionally, FinTech companies demand more flexible loan requirements because, unlike banks, they do not rely on highly regulated depositors’ money. Their funds come from institutional and individual investors who are prepared to assume very high financing risks. Either they get their funds from institutional investors such as venture capital firms, private equity funds or hedge funds, or they pool the investments of small investors through a market lending platform.
Traditionally, small businesses were not eligible for bank loans due to their history or an inadequate credit rating. Today, fintech has developed innovative credit scoring models that extend borrowing opportunities to more businesses and people. They rely heavily on non-traditional data points like a business rating on Yelp and how the business interacts with its LinkedIn network. When a bank relies on human decision making to grant a loan, fintech lenders use semi-automatic risk assessment methods. The methods lend credibility to many useful factors that demonstrate the likelihood of a business repaying the loan.
Finally, fintech offers lower borrowing rates. Unlike banks, fintechs don’t need physical branches and lots of experienced staff to serve clients who come along. Therefore, fintechs offer more competitive rates to borrowers. The lower operating costs can be attributed to the lack of regulatory obligations, capital requirements and compliance, which are required of banks.
While fintech companies haven’t replaced traditional banks in the lending industry, they have disrupted the industry in ways that enhance the borrowing experience. By introducing new efficiencies, fintech companies have been able to significantly reduce costs while improving the quality of services. Fintech innovations in data collection and analysis have brought new ways of assessing risk.