Here’s Why So Many Fintech Startups Are Loaning To Small Businesses

Last Updated: October 29, 2020 By

In the past, banks were the number one source of getting loans. However, things are not the same anymore. Due to the rising trend of Fintech companies, banks are forced to take a back seat. Loans help small businesses maintain healthy cash flow. Through loans, small businesses can issue credit to their customers and, at the same time, pay their day-to-day expenses, keep their payroll running, and have enough cash for any unforeseen circumstances.


Previously, small businesses had to get loans from banks at high-interest rates. Most of the time, banks did not approve small businesses for a loan because they couldn’t afford to take the financial risk of failure in the context of the credit card crisis that took place between the years 2007 – 2009.

Banks have made it even harder to borrow loans and have created a series of hurdles for small businesses that apply for loans. Banks have managed to improve the state of their balance sheets, but it had a devastating impact on small businesses who are already struggling to make ends meet. This is where the role of Fintech startups have come to the rescue of small businesses:

Why Fintech?

Fintech startups have opened an array of new opportunities in the post-covid world. Fintech applications initially provided services to online banks and Robo-advisors. However, the industry is now more focused on small businesses to provide them with a financial infrastructure that is both stable and reliable in the current market.

According to the US Small Business Fintech Report, the Fintech industry has managed to raise more than $10 billion since the year 2013. The report is proof that the Fintech industry has great potential. One of the areas where Fintech startups have had the greatest impact is lending loans to small businesses.

The growing number of loans provided by Fintech firms in the Paycheck Protection Program is also proof that Fintech firms are becoming increasingly popular sources of providing loans to small businesses, especially after the coronavirus pandemic. Let’s further discuss why Fintech startups are loaning to small businesses.

Traditional Banking Procedures – A Hurdle for Small Businesses

Traditional banking procedures have become more and more complicated in the past few years. We have listed some of the requirements that banks ask for before they can process the loan applications of small businesses:

Past Performance

Banks evaluate the financial stability of the business before giving loans. To check stability, they review the past performance of the business to determine the health of their cash flow. They wish to see is the credit history of the business before doling out cash.

However, most small businesses are startups and the first few years of any business are notoriously shaky. While banks reject companies with less than 4 years of credit history, Fintech will typically require only one years’ worth of credit history to process the application.

A Healthy Cashflow

Banks are always keen on knowing the credit history as they want to see the business’s ability to pay off debt. Loan agents want to see whether the business will be able to pay off the debt and the only way they can do this is by having healthy cash flow. A business is generally required to earn revenues of a certain required amount to qualify for a loan.

For a small business like a local fresh produce business, a dry cleaner, or a carpet cleaning service, this is simply not possible, which disqualifies them for a bank loan. Previously, these small businesses turned to private lenders, crowdsourcing, and other means to get the funds they need. But since the advent of Fintech, they turn towards Fintech firms who are willing to grant loans to companies generating revenues as low as $100,000 on an annual basis.

Heaps of Paperwork

Banks require small businesses to submit heaps of paperwork along with their loan application. Once the paperwork is filed, banks take somewhere between 1 and 3 months to process the application. The bigger the bank, the more time it will take.

The loan might still not be approved, and there is a chance that the bank may not even give you a valid reason for rejection. On the other hand, Fintech companies will take 1-3 days to process your application and approve your loan. Some Fintech lenders are famous for approving your loan application within minutes!

Fintech Firms – Increasing Accessibility

In contrast to banks, Fintech firms can facilitate small businesses without much hassle. To understand why Fintech firms can benefit small businesses, let’s try to understand the work processes of Fintech banks in contrast with those of traditional banking.

Integrating New Technologies

Fintech companies have an edge on traditional banking systems when it comes to integrating new technologies. The startups that are developed based on new and improved technical features face no difficulty keeping up with the existing trends. Whereas, traditional banks are unable to function in this way as they are stuck with age-old methods.

Their ability to make decisions is restricted due to a lack of knowledge regarding customer analytics and customer behavior. On the other hand, Fintech companies can accurately make decisions and analyze their customers’ credit history much more quickly, enabling them to grant loans within days.

Improved Credit Scoring Model

Traditional banks use a credit scoring model that is both outdated and lengthy. The new model will instantly derive a conclusion just by looking at the past data and can tell whether the client is worthy of a loan or not. This is why businesses, even those with a small credit history, are eligible for a loan through Fintech firms. Moreover, these firms can make better credit decisions as they are using efficient algorithms to derive conclusions for them.

Enhanced Digital Experiences

In the digital age, consumers are now demanding faster and more efficient online services. This is something that traditional banks cannot provide them due to their business model as they are unable to adapt to the changing digital environment. Fintech firms are in a better position to use digital mechanisms to operate and work faster than traditional banks.

Integrating Platforms

There are very few banks that are IT transformations. Most banks have an outdated system, and they lack communication. Their legal systems which make them inefficient. Contrary to this, Fintech companies have more efficient business models, and their communication system is more sophisticated, which makes it easier for them to communicate with the consumers.

What’s Next?

Regardless of the benefits that Fintech startups offer, consumer’s banks still have an advantage over them. Their previous customer relationships and steady balance sheets, and market rapport give them a huge advantage, but over time this might change as well as Fintech startups make their place in this industry.

Choosing the right technology can be difficult with so much variety in the market. It is also tempting to subscribe to several applications at once, as they are all appealing. As a small business, the truth is that you nor your team will be using all of them at the same time. It is better to evaluate the applications and choose the one that is right for your business.

Once you have chosen a technology, make sure that all your team members are on board and provide the necessary training wherever requires to educate them about the new features and the benefits that it could provide for them in the long-term. If you understand what Fintech can do for your business, you can leverage it to your advantage.