Alternative Lenders Firms Are Economic Multipliers. Here’s Why.
Stock market indices may have stabilized, but you wouldn’t guess it by speaking to small business owners around the country. For the first time in eight quarters, a Florida Chamber of Commerce survey of small business owners found that economic uncertainty beat out workforce quality as their primary concern.
But it’s not just in Florida — or even the U.S. — that small businesses are struggling with financial uncertainty. A study published this January by the Association of Chartered Certified Accountants found that domestic market conditions and access to funding ranked among the top five barriers for high growth among global small- and medium-sized enterprises.
FinTech companies can’t change local market conditions, of course. When it comes to easing the financial uncertainty entrepreneurs feel, however, FinTech firms have a leading role to play.
FinTech for Local Communities
Particularly in suburban and rural areas, small businesses tend to be B2C product companies. To make relatively large purchases, like an office remodel or industrial oven, they rely on many small sales.
In times of plenty, that model works. But when a downturn hits or a machine breaks, small business owners often find themselves thousands of sales short of the savings they need. No wonder the Federal Reserve’s latest Small Business Credit Survey showed that 43 percent of small business credit applicants were borrowing to fund operating expenses. Understandably, nearly nine in 10 of them said their preferred financing product was a loan or line of credit.
Although some of those small business owners do find loans through name-brand banks, the reality, according to an NDP Analytics report, is that small business loans have been declining since 1995, when they made up nearly half of all bank loans. To secure the funds they need, the rest are increasingly looking to alternative lenders — in other words, FinTech companies.
In contrast to banks, alternative lenders have additional flexibility in the metrics they use to qualify a borrower and in the loans they provide. Automated small business lending platform Kabbage, for instance, allows applicants to link merchant accounts like PayPal and Amazon to their application. By taking into account data like transaction frequency, banking history, shipping information, and business social profiles, Kabbage has automated the approval process for small businesses to access ongoing lines of credit of up to $250,000. The NDP Analytics study shows that alternative lenders like Kabbage approve small business loans up to 86 percent of the time for firms valued at less than $1 million — nearly four times as often as the big banks.
Small Businesses, National Impact
FinTech firms approve more small business loans than their traditional peers, but how much impact does that actually have on the national economy? As it turns out, quite a lot.
According to the U.S. Small Business Administration, small business make up 99.7 percent of American businesses, employ nearly half of American workers, and account for 50 percent of the non-agricultural GDP. Every dollar lent to those businesses, NDP Analytics reports, creates between $2.01 and $5.59 in gross output of the borrower’s local community.
On a national scale, that increase in output adds up. When NDP Analytics crunched the numbers, it found that $10 billion in online lending between 2015 and 2017 generated $37.7 billion in gross output and created 358,911 jobs. Without those loans, a population larger than the city of St. Louis wouldn’t have a job.
Dig a little deeper, however, and the national economic benefits of alternative lending look even better. The NDP Analytics study showed that online small business loans are a buffer against economic inequality, which continues to worsen in the U.S. and threatens the nation’s credit rating. Nearly a third of such loans went to borrowers in communities with incomes below the national medium. And in a time when tech and finance are dominating the economy, online small business borrowers are exceptionally well spread across industries and age brackets.
FinTech’s Global Impact
Unlike in the U.S., the alternative lending sector in other areas of the world is still developing. In the Asia-Pacific region, for instance, the alternative lending market grew 81 percent year on year in 2017 to $3.6 billion. Excluding the U.K., which already has a robust alternative finance market, the European sector grew by 101 percent year on year.
Although not all of that growth represents new economic activity — some replaces business that would have otherwise been done by banks — it does represent a shift toward a less bank-centric world. Kabbage recently noted $1 billion of total funding accessed by its customers occurred outside of normal banking hours, indicative of shifting expectations and behaviors.
To understand why that matters, imagine what would’ve happened had the U.S. government not stepped in to save struggling banks during the 2008 financial crisis. Merrill Lynch, Fannie Mae, HBOS, Royal Bank of Scotland, Bradford & Bingely, Fortis, AIG, and more all came within a hair of collapse. The fewer financiers that capital is distributed between, the greater the danger to the entire system when an economic crisis strikes.
Alternative lenders may or may not help prevent another financial crisis. But across local, national, and global economies, they play a much larger role than their “alternative” label implies. On that point, small business owners, financial policy professionals, and global economists can agree.