Many start-ups are launched, propelled by a brilliant idea, but often face tough times due to inadequate funds. The first impulse is to turn to banks, which, however, usually refuse requests for a loan for business without security. They also ask for plenty of documents to corroborate the need for the grant and the purpose that it will be used for.
A parallel source of finance for small businesses come in the form of non-banking financial companies (NBFCs). Traditional NBFCs offer loans on terms similar to banks, but they do not hold a banking license. In addition, unlike banks, they cannot accept deposits from public. Other than loans and credit facilities, they can offer retirement planning schemes, money market instruments and underwriting activities.
While small and medium enterprises (SMEs) have been turning to banks and NBFCs to get loans, the long-drawn process from application submission to disbursal of funds is still a deterrent for many. After the financial crisis of 2008, there was an even greater need for reliable sources of business finance. Interestingly, the digital technology that gave rise to online banking and e-commerce was also progressing at a fast pace in the same period. This helped to create a new segment of NBFCs in the form of financial technology, known as FinTech companies.
With the aid of complex analytic tools, FinTech companies evaluate credit risk by using an array of customer data, including their digital footprint on social media, e-commerce platforms, smartphone usage and geo-location.
How are business loans by FinTech lenders more convenient than traditional loans for borrowers?
Conventional NBFCs do not usually have a human-centric approach to lending. The lengthy and cumbersome process of applying for business finance that requires piles of physical documents tires out borrowers. Young entrepreneurs who are eager to expand their operations and are confident about returns on their investment cannot afford to wait for long. Also, delays in work can also harm their long-term business interests. They need an alternative source of funds that can cater to their needs more actively.
What draws the digitally perceptive entrepreneurs to a FinTech company is its ability to offer quick loans at competitive rates of interest. Such companies have a holistic approach towards risk assessment and do not ask for heaps of paper-based documents before they start considering an approval for the loan. The basic files needed to check the creditworthiness of the borrower can be uploaded on the encrypted portals of FinTechs.
The advanced machine learning algorithms that these lending platforms employ read through information such as the net earnings of a business, the educational and professional qualification of its owners, the location from which the business operates and the returns on investment that it drew in the past one year. In comparison to this, a traditional NBFC loan is issued to companies that have been in business for at least 3 to 4 years.
Summarily, the prime reasons for which business borrowers prefer FinTech platforms are:
Simplified application process – Instead of visiting a branch in person, they can apply for the business loans from anywhere and at anytime. As the process is digital, all they need is a reliable Internet connection and the soft copies of minimal documents.
Swift funding – Unlike conventional NBFC loans, the funds from a FinTech corporation do not take long to be approved and disbursed.
No prepayment penalties – To make up for their loss on interest due to early pay-off on the loan, banks as well as most NBFCs charge a percentage of the loan amount as penalty. This is not the case with new-age technology based lending organisations. If a borrower can afford to make complete payment on the loan earlier than its stipulated tenure, there are no extra charges.
No hidden charges – You may on occasions have felt surprised when a bank or NBFC told you that there would be a payment protection “insurance premium” charged on your business loan. In the traditional lending sector, such charges are normal. The lending institutions claim that these help in protecting the monthly loan instalments in case sudden sickness or an accident prevents you from making payments on the loan. FinTech organisations do not include such clauses in their agreements. The funds are granted for business expenses in the short term and are approved based on the ability of the borrower to pay back.
The ability of FinTech firms to trawl the online portals and gather data relevant to the borrower’s paying capacity helps in affording more growth opportunities to start-ups. Many SMEs in India have reasonably strong business models, but they still cannot manage to get funds from banks and traditional NBFCs. This shift towards technology-backed alternatives has been favourable for promising ventures.
At the same time, the conventional lending institutions should also understand that FinTech companies are not a threat to their existence. Both these sectors can collaborate with each other in areas such as customer acquisition, product innovation, analytics, sales enablement and cyber security.
The access to innovation through digital peer-to-peer lenders allows NBFCs and banks to create competitive advantages for their own business.
Customer-centric innovation triggered by FinTechs is here to stay. The possibility of getting a loan for business without security or collateral is real. Open architecture-based wealth management tools, Big Data and online financial advice will continue to help entrepreneurs.
As a digital-age lender in this domain, Capital Float uses proprietary algorithms to inspect large amounts of data and evaluate a potential business borrower’s creditworthiness. We offer timely business finance without collateral to SMEs, start-ups, and freelancers to help them bear the expenses that are crucial for their stability and growth in the business world. Our process of judging the payment capacity of businesses is automated, fast and flexible, while also being diligent. If you need loans in less than a week and do not have a very long history in your industry, do not let any refusal from traditional NBFCs discourage you. Visit www.capitalfloat.com to find the business loan best suitable to you.