Is Bank Small Business Lending Making a Comeback at Expense of Fintech?

Checkbox labeled Approved with hand holding pen that have just finished checking the box

Many of the Fintech lending initiatives have been dead set on helping the poor small business (“SMB”) that in the past had to borrow on credit cards, and if they were lucky, banks.

OnDeck, Funding Circle, DealstruckP2BinvestorTheCreditJunctionInternexCapital and others have gotten into this space with technology first, investors and bank lines, and using the internet to originate deals. I have written about some of them here and here

Many were overnight successes. We are now starting to see the casualties happening with those, for whatever reason, that could not make it. As an example, Dealstruck is closing its doors after more than three years in business.

SMB lending tends to be clustered at either end of credit spectrum – from subprime and mid-prime lending to prime and super-prime borrowers. For Fintech companies, the cost of acquisition is always high for SMB and the lifetime value of a customer is low if you only have one product. You know the saying, If all you have is a hammer, every problem you see is a nail.

I divide the “Fintech” lending market as those that provide online options for Small Business Term Loans > 250K and those that are <250K.

Another way to slice it is the lending suite. For many fintech vendors, they started out being a one product pony and soon learned they needed to enhance their product suite to compete.  SMB lending suite can be comprised of:

  • Purchasing cards (sometimes the easiest thing to get from your banker is a 10K or 25K card),
  • Term loans,
  • Line of credit,
  • Equipment leases,
  • Inventory & receivable finance (ABL, single invoice finance, etc.)
  • Working capital loans

Banks can offer a full suite of small business lending. According to Rohit Arora, CEO of Biz2Credit, their latest index showed surges in traditional banks’ SME loan approval rates in November, hitting 23.7 percent. According to researchers, eight out of the past nine months have seen loan approval rates for small business applicants increase among traditional, large banks. Even small banks have seen their loan approval rates tick up to 48.8 percent.

So what are some of the interesting areas TFM is watching?

I am working in several areas which show promise in this space:

  • Ledger Extraction tools to facilitate SMB overdraft finance -A few notable banks, namely Barclays and HSBC, have recently rolled out a capability that enhances the overdraft facility for small business lending by using their receivables as collateral. The capability was developed by the vendor hpdsoftware, where their Gemini solution goes into the seller’s books on a real time basis. The seller must agree to upload a bit of software on their ERP and the software then extracts data out of their ledger entries, including credit notes, and feeds the bank’s lending system.
  • Specialty finance lenders are now starting to work with the purchase to pay, B2B, and Supplier Network vendors on business credit and Supply Chain Finance. There are huge issues around finance and networks such as the different type of expenses networks process, traction, data requirement + modeling, data privacy, managed services, marketing, etc. that need to be thought through.
  • Investment in technology and analytics is helping the cause.  Banks such as JPMorgan (OnDeck) and Regions (Fundation) are working with partners where advances in analytics enables the banks to approve a higher percentage of loans.
  • Single Invoice Finance solutions specialized by industry –We believe we are on the verge of various sectors developing capabilities to finance invoices in construction receivables, healthcare, and transportation.
  • Loans to the contracting sector present an opportunity.  Supply chains are filled with SMB contractors – media services, advertising, software, events, etc. These contractors are typically independent small companies coming together to provide services to much larger buyers down the food chain. Many of these contractors and outsourced work force submit time sheets, which can be used for finance.

Remember this is not an easy space. To put the problem in perspective, in Europe, more than 92% of SMEs actually fall into the category of micro enterprises where the majority of their credit history was found in consumer credit bureaus rather than in commercial credit databases.  These small businesses trade on a cash or credit card basis.

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