Small and medium-sized businesses (SMBs) on Main Street still struggle with cash flow as the pandemic eases, but they’ve come to rely on the new generation of FinTech lenders to help them through the worst .
In the April 2022 working paper “The Impact of Fintech Lending on Credit Access for US Small Businesses” published by the Federal Reserve Bank of Philadelphia, an analysis shows that alternative lenders are proving to be more responsive to SMEs than traditional banks to many ways.
The strength of FinTech lenders is their ability to “digitally collect and analyze non-traditional data, including what used to be called informal information in relationship lending. This allows them to capture a more complete financial picture of borrowers than traditional lenders.
The PYMNTS data underscores the urgency that high street SMEs are now facing.
In The Main Street Economic Health Survey: Navigating Economic Uncertainty, a collaboration between PYMNTS and Melio, a survey of more than 500 U.S. SMEs, we found that while “cash buffers have improved for some businesses, the share of companies with no available cash increased to 18% from 15% in the first quarter, showing the cash pressures that turnaround SMEs are still experiencing.
Highlighting the problem, the Main Street Economic Health Survey noted that “25% of Main Street businesses that sell primarily through physical locations do not have cash on hand – nearly double the proportion of businesses without cash that conduct most of their business online”.
Get the study: The Main Street Economic Health Survey: Navigating Economic Uncertainty
The alternative credit report
With traditional credit tight in a volatile and inflationary economy following a two-year global health emergency, Main Street businesses are looking beyond their major banks to find the cash needed to invest in digital solutions and make their more resilient operations.
The Philadelphia Fed report notes several ways non-traditional lenders have used different data — or used data differently — to lend to SMBs that lack the good faith that big banks typically require, but who have established a solid history with payment platforms offering financing to SMEs.
According to this report, “several big-tech payment platforms, such as Amazon, and FinTech payment companies, such as Square and PayPal, have also lent to business owners who may have thin credit records. , but whose cash flow and payment transactions have been established through their payment platform.
See also: UK SMEs get ‘instant, one-click’ loans via in-app finance
Liquidity and risk
By comparing microdata from small business lending platforms (SBL) Funding Circle and LendingClub, as well as traditional credit card data analyzed monthly by the Fed, the report concluded that FinTechs are filling a vital gap – and further competing with traditional lenders.
“FinTech lenders can serve borrowers who were less likely to receive credit from traditional banks [because] they use alternative data to improve the credit rating,” he says.
The working paper adds that “internal credit scores from FinTech platforms were able to predict future loan performance more accurately than the traditional credit score approach”, adding: “We confirm that lenders FinTech extend credit to additional borrowers at a lower cost.”
It is clear from both the Philadelphia Fed analysis and the PYMNTS data that other sources of corporate finance are helping light-file businesses and SMEs in underserved “credit deserts” manage the cash flow, and many remain underfunded as the New Year approaches.
To illustrate, the PYMNTS Main Street Economic Health Survey found that 31% of personal and consumer services businesses had no cash reserves in the first quarter, as did 29% of establishments. retail, 11% of food, entertainment and lodging companies, “and 10% of both professional services companies and construction and utility companies surveyed.”
There are doubts, however, as the Fed and other agencies examine the impact of new credit models like buy now, pay later (BNPL), as well as the premiums FinTechs charge for loans to SMEs.
The working paper notes that there are “concerns about the potential impact of these disruptive business models on consumers, business owners, and financial stability, particularly if FinTech credit scoring techniques are not leveraged. turn out to be invalid at a different stage of the economic or financial cycle (such as a deep recession).
See also: Small businesses need credit, lenders need a better way to assess that risk