With More Options And More Data, The Future Is Bright

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Bernardo Martinez is the Vice President of Global Merchant Lending at PayPal, leading the company’s merchant lending strategy. getty Despite the clear impact small businesses have on the global economy, small-business lending has been a challenge for traditional institutions due to a variety of reasons. This has led to a challenging, […]

Bernardo Martinez is the Vice President of Global Merchant Lending at PayPal, leading the company’s merchant lending strategy.

Despite the clear impact small businesses have on the global economy, small-business lending has been a challenge for traditional institutions due to a variety of reasons. This has led to a challenging, frustrating experience for small businesses, resulting in the traditional loan application process taking an average of 26 hours, according to a 2013 Federal Reserve survey. A 2021 Federal Reserve small-business survey found that 23{fbc7a75af74adfbeb2d3baecdf7daa64e5d3521205059ee8f1fef6bec19bbc34} of businesses that applied for financing did not receive the full amount they sought, while an additional 30{fbc7a75af74adfbeb2d3baecdf7daa64e5d3521205059ee8f1fef6bec19bbc34} had unmet financing needs.

These kinds of challenging experiences have led to a new wave of financing providers entering the fray over the past several years. These include payment processing companies, financial technology companies and others that review a wide variety of data that can provide new insights into a company’s health. However, the pandemic impacted not only small-business owners, but also alternative lenders providing financing. As a result, capital access during the pandemic has been strained and has created additional challenges for small businesses in the United States and around the world. This required governments to launch new programs to help keep businesses afloat.

Alternative lenders — often born out of the digital era as opposed to the traditional financial system — have taken the learnings of the computer age and applied them to business financing. As small businesses have continued to move online, especially in response to the pandemic, more data has become available, providing greater insight into a business’s finances and overall health. This doesn’t mean reviewing just profit and loss documents but transaction-level data, how consistent the business might be on a month-to-month and even day-to-day basis.

Alternative lenders have three focal areas that differentiate them from traditional lenders. These include:

• Data: Traditional loan providers have a relationship with business owners but don’t generally have access to the data that can truly simplify the application and decision-making process. For example, a business owner applying with an alternative lender may log into their account as the first step of the application, which enables the lender to use payment data as part of the underwriting process and facilitate an easier customer experience. This may simplify the application process as the customer may not need to provide additional documentation or fill out the form.

• Customer experience: With a predominantly online-first, digital-native perspective, small businesses can apply for financing outside traditional business hours — when most are preoccupied with keeping their business running and making sales. While customer experience is often thought of in design-centric terms, features that enable accessibility sometimes have the greatest impact on a customer’s experience.

• Flexibility: Alternative lenders, through their knowledge of business owners, can tailor applications to best serve their customers. This may mean forms are filled out in advance with information the provider has, or it may not ask those questions.

Even though alternative lenders may be a good alternative, it is important that small-business owners find the right products and right lender for the project they are undertaking. Business owners must always consider their purpose for the financing and terms they are comfortable with. For example, providers who allow very short-term loans or high interest rates on longer-term loans might not be the right partner if a business owner is looking to purchase new equipment or inventory for seasonal sales.

During the pandemic, alternative lenders leveraged their core principles to support the U.S. government’s Paycheck Protection Program by enabling the Small Business Administration to reach smaller businesses in America. These lenders will play a significant role in the global recovery as they continue to provide access to capital to small businesses that turn to the digital economy as a critical element of their future post-pandemic.

Investments in data, experience and innovation to support small- and medium-sized businesses will clearly pay dividends, but without the help of federal and local governments, there is a ceiling on how easily help can be provided. Governments can further advance data capabilities for all lenders in the market, such as the IRS granting access to their accessibility API and local company information. For example, the IRS can help when verifying income information and company information — data that might not be available in the market or require additional documentation from the small-business owner. Providing access to such information would diminish the transaction cost of verifying a small-business owner’s identity and income, resulting in a lower cost for applicants.

Finally, with the post-pandemic digitalization acceleration and potential new data sources supported by the government, the future of small-business lending may never have been brighter, more accessible and more inclusive for small-business owners.


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