Main Street small and medium businesses (SMBs) are still struggling with cashflow issues as the pandemic wanes, but they've arrived at rely on the new breed of FinTech lenders to obtain them through the worst of it.
In the April 2022 working paper \”The Impact of Fintech Lending on Credit Access for U.S. Small Businesses\” published by the Federal Reserve Bank of Philadelphia, an analysis implies that alternative lenders are proving more responsive to SMBs than traditional banks in many ways.
FinTech lenders' strength is their ability to \”to digitally collect and analyze nontraditional data, including what was once referred to as soft information in relationship lending. This allows them to capture a far more complete financial picture from the borrowers than traditional lenders can.\”
PYMNTS data underscores the urgency that Main Street SMBs are now facing.
In the research The Main Street Economic Health Survey: Navigating Economic Uncertainty, a PYMNTS and Melio collaboration, market research of over 500 U.S. SMBs, we found that while \”cash cushions improved for many firms, the portion of businesses without any available cash rose to 18% from 15%,\” in Q1, showing the cash pressures that recovering SMBs continue to be under.
Underscoring the problem, the Main Street Economic Health Survey noted that \”25% of Main Street companies that sell mostly through physical locations have no available liquidity – nearly double the portion of firms without any liquidity that conduct many of their online businesses.\”
With traditional credit tight inside a volatile and inflationary economy developing the heels of two-year global health emergency, Main Street companies are looking beyond their primary banks for the cash needed to purchase digital solutions and make their operations more resilient.
The Philadelphia Fed's report notes several ways that nontraditional lenders used different data – or used data differently – to give loan to SMBs lacking the bona fides big banks typically require, but who have established a solid history with payments platforms offering SMB financing.
According to that particular report, \”Several big-tech payment platforms, such as Amazon, and FinTech payment firms, such as Square and PayPal, also have lent to business owners and also require thin credit files, but whose cash flows and payment transactions have been established through their payment platform.\”
Comparing microdata from small company lending (SBL) platforms Funding Circle and LendingClub, along with traditional charge card data analyzed monthly by the Fed, the report figured FinTechs are filling a vital gap – and competing more with traditional lenders.
\”FinTech lenders can serve borrowers who have been not as likely to get credit from traditional banks [because] they employ alternative data to improve credit scoring,\” it states.
The working paper added that \”FinTech platforms' internal credit ratings could predict future loan performance more accurately compared to traditional approach to credit scoring,\” adding, \”We make sure FinTech lenders provide credit to additional borrowers at less expensive.\”
It's clear both in the Philadelphia Fed's analysis and PYMNTS data that alternate causes of business financing are helping thin-file businesses and SMBs in underserved \”credit deserts\” address cashflow, and many remain underfunded like a new year steams ahead.
To illustrate, PYMNTS' Main Street Economic Health Survey found that 31% of personal and consumer services firms didn't have cash reserves in Q1, as did 29% of retail establishments, 11% of food, entertainment and accommodations businesses, \”and 10% of both the professional services firms and also the construction and utilities businesses surveyed.\”
There are doubts, however, as The Fed and other agencies examine the impact of new credit models like buy now, pay later (BNPL), along with the premiums FinTechs charge for SMB loans.
The working paper notes there are \”concerns concerning the potential impact of these disruptive business models on consumers, business owners and financial stability, particularly if the FinTech credit scoring techniques do not prove to be valid inside a different stage of the economic or financial cycle (such as a deep recession).\”