Fintech is still pushing its way into the lending market, though it’s not as impactful as you might think.
The business loan market saw a shift toward new technologies like online lending in 2019 — continuing a trend that started over a decade ago. But rather than the sharp division between banks and online lenders we might have seen a year ago, 2019 saw collaboration.
Here are the top four trends in the business loan landscape that might also affect your ability to get a loan.
1. Online lending is on the rise
More companies applied for an online business loan in 2018 than in previous years, according to the Federal Reserve’s 2019 Small Business Credit Survey (SBCS). Some 32% of business loan applicants applied for funding from an online lender that year — up from 24% in 2017 and a mere 19% in 2016.
Who’s pushing this trend? Medium- and high-risk borrowers, including new businesses, those in certain industries that have a higher rate of default and business owners with poor personal credit. Of these borrowers, 54% were more likely to apply with an online lender than a large bank. And 41% were more likely to apply with an online lender than a small bank.
One reason could be that online lenders are more likely to work with borrowers who typically can’t qualify for a bank loan. It’s also possible these businesses just don’t have the time to apply for multiple bank loans — especially those just starting out or struggling with revenue. In fact, the top reason small businesses applied with online lenders was speed, according to the SBCS.
2. Getting a small business loan from a bank might become easier
A few years ago, financial experts were predicting the fintech takeover of banks. Now, those predictions have dialed back.
Rather than completely replacing banks, fintech companies have started to form partnerships with these mammoth financial institutions to combine strengths. Fintech companies bring easier applications, faster underwriting and a new way of predicting a business’s ability to repay a loan. While a business owner’s credit score, revenue and time in business are still hugely important, you might notice lenders paying attention to other factors like shipping data in the near future.
What does this mean for small business owners? It could be easier to get approved by both banks and online lenders in the near future. You might even save time on your business loan application.
3. Slightly more than half of small businesses don’t have the financing they need
Around half of small businesses were struggling financially in 2018, according to the SBCS — 52% to be exact. Of those that applied for credit, only 47% received the full amount of financing. And around 29% didn’t even apply for financing, fearing debt or feeling discouraged, among other reasons.
Businesses that struggled the most to get funding were primarily either startups, unprofitable, located in urban areas or had owners with bad personal credit. The main reason businesses were rejected was poor credit, closely followed by too much debt and not enough collateral to back the loan. Those looking for $100,000 to $250,000 in financing were rejected more often than borrowers looking for other loan amounts — both higher and lower.
If you’re a business owner who wants to up your chances of approval, consider taking steps to improve your personal credit score — lenders still tend to rely on these rather than business credit scores. Or consider focusing on paying off any business debts before applying for more financing.
4. There’s a perceived increase in scams targeting businesses
Around 67% of small business owners believe there’s an increased risk in scams targeting businesses, according to a 2018 joint survey by the Federal Trade Commission (FTC) and Better Business Bureau. Whether this is actually true or not is unclear. But it shows business owners feel less secure working with a lender they don’t know and trust.
With a rise in online business transactions, it can be difficult to know which companies to trust and which to avoid. The FTC recommends researching new lenders before you apply by searching for the company’s name and the word “scam” on Google. Getting word-of-mouth recommendations is another good way to stay away from illegitimate companies posing as lenders.
Surveys saw an uptick in online lending last year, and banks are joining in on the game by working with fintechs to up their technological capabilities. But while applications might be easier to complete and process, businesses still sometimes struggle to secure funding.
This guest post was written by Anna Serio of Finder.
From newspaper editor in Beirut to trusted loans expert in the US, Anna Serio has published more than 500 articles on Finder to help Americans strengthen their financial literacy. Anna writes about personal, student, business and car loans supported by two years of increasing expertise. Today, digital publications like Fundera, Business.com, Success.com and ValueWalk feature her articles for professional advice and best practices with financial products.