Until recently, if you were in need of a small business loan you had the choice between applying for a loan at your bank or credit union or using company credit cards. However, thanks to advancements in financial technology borrowers now have a much broader range of options when it comes to securing funding. Given that banks have been decreasing small business lending continuously since the 2008 financial crisis, new alternative financing options have emerged as a blessing for small and medium-sized business in need for funding.
Fintech, which stands for financial technology, refers to a new tech sector that provides customer-friendlier and easier-to-use financial services by implementing innovative technologies to build their services. Start-ups in the fintech space are disrupting the current status quo of the financial industry to the benefit of the consumer and SMEs.
In this post, you will be introduced to three new ways how you can raise funds as a small business owner by using services provided by fintech start-ups.
Small business loans
Small business loans have previously only been available from banks and credit unions and involved a lengthy and stringent application process. However, thanks to fintech start-ups that are using big data and algorithmic analysis to assess borrowers, small businesses can now apply for loans online on digital lending platforms and find out if their funding requirements can be met and at what conditions within a matter of minutes.
Interest rates on small business loans from online lenders can at times be lower than those from large banks or credit unions.
One of the most innovative new financial services that has sprung out of the fintech sector in the last 10 years has been so-called peer-to-peer lending. Peer-to-peer lending refers to a method through which small businesses can borrow from a range of individuals without the use of a costly traditional financial intermediary. This enables debt financing for those who are finding it hard to secure a loan from a bank. On the other hand, individuals who lend money through peer-to-peer platforms can high strong fixed interest returns, uncorrelated to the performance of the stock or bond market.
To get your funding requirements listed on a peer-to-peer lending platform you need to undergo the peer-to-peer lender’s due diligence process and then agree with the lending platform’s terms and conditions for the loan. Once both parties agree, your loan will be put up on the online platform ready for individuals to invest in it. Once your loan is fully funded it will be dispersed to you and you will repay a small chunk each month as the majority of peer-to-peer loans are amortizing loans.
Interest rates on peer-to-peer loans vary depending on your business’ financial situation and credit history.
Another way to receive funding for your small business, which has previously only been available to large multinational corporations, is through invoice factoring. Invoice factoring refers to a type of debtor financing where a company sells its accounts receivables at a discount in return for immediate cash. This is an excellent way to keep your cash flows steady, especially when you are a small business and temporary cash flow shortfalls could put your entire business at risk. There are now various fintech start-ups offering this much-needed service and any business with stable financials that is dealing with invoices can apply for such a service to help its cash flow situation.
A small fee is charged for the invoice factoring service, but one that is small enough for invoice factoring to be an excellent source of funding for a small business.