Banks or FinTechs - Who Does a Better Job for Business Loans?
Banks have a broad existing customer base and FinTechs have new ideas, agile implementation, and cutting-edge analytics
Budding entrepreneurs with revolutionary business ideas (usually) need financing to keep their operations running. Banks have encouraged the growth of small-scale industries with access to credit, but the supply cannot keep up with the demand. Enter: Financial technology companies, aka FinTechs.
The global FinTech industry is maturing rapidly - with over $41.7bn invested in just the first half of 2018. Part of those deals was for FinTech lenders, who have supported the trend of industrialisation by granting business financing to those who were denied from traditional banks.
If you have begun a new venture and are seeking a loan for business expansion, you may have wondered who a more suitable lender will be – a bank or a FinTech.
Consider the following when making your decision:
1. The Flexibility of Sending an Application: At present, banks in India aren’t open on Sundays, second and fourth Saturdays and on gazetted holidays. Since you typically need to visit a bank branch in person while applying for business financing, it means that there will be days when you'll be sitting around not making any progress towards getting your loan. Oppositely, you can reach out to a FinTech company any day of the week and submit an application from your computer or mobile device.
2. Loan Processing Time: When you apply for a bank loan, it can take a few weeks before you receive the funds. Most banks follow strict rules in verifying the credibility of small businesses organisations before they release funds. If you need the funds fast, working with a FinTech is a better option. The process from the submission of an application to getting funds in your account is all digital and far quicker.
3. Collateral Trouble: Banks have been lending to both individuals and businesses based on collateral that has to be pledged for security. This could be a residential or commercial property, gold holdings or any other asset that can be liquidated in case the borrower is unable to pay off the loan in the stipulated period.
FinTechs do not ask for collateral. If you are reluctant to offer collateral or don't have the kinds of assets that a bank is looking for, a FinTech company will still be willing to grant you a business loan.
4. Years in Business: Banks in both public and private sectors lend to organisations that have been operational for three to five years. That's an impossible requirement to meet if you're just starting your company.
FinTechs have come to the rescue of entrepreneurs by granting loans to businesses even if their establishment has just celebrated its first birthday.
5. Nature of Operations: The rise in technology paved the way for thousands of new business ideas to be uncovered. If that idea is unconventional and banks or traditional lenders aren't willing to offer loans for those ventures, how do you get it funded?
FinTechs support this generation of businesses by increasing lending to e-commerce companies, digital marketing organisations, medical breakthroughs and other projects that use technology innovatively.
6. Prepayment Penalties: When you take a personal or business loan, you can choose to pay it back as soon as possible. However, the lending policies of traditional sources of finance in India have been such that borrowers are penalised if they repay early. If you have windfall gains in business and want to pay off your debt early, you could be charged at least 5% of the loan amount as penalty. That may be quite disappointing for a wise businessperson to learn!
FinTechs have eliminated this trouble. There are no (or very low) preclosure penalties when you get a business loan from a FinTech lender. Additionally, their flexible repayment options give you the liberty to pay without straining your business operations or affecting your personal funds.
The New Revolution
To solve some of these problems, the relationship between traditional banks and FinTechs is shifting from competition to partners. They have their own individual strengths: banks have a broad existing customer base, low cost of capital and regulatory compliance while FinTechs have new ideas, agile implementation, and cutting-edge analytics.
The long process of securing a loan can now be done in a matter of days, or even hours!
When working together, the hassle of securing a business loan can be eliminated and in the end, put the customer first.
Rohit Arora, CEO of Biz2Credit, is one of the country's best-known experts on small business financing and financial technology (FinTech).
Biz2Credit was founded in 2007 and is backed by Nexus Venture Partners. Since its inception, Biz2Credit has become the leading online marketplace for small business funding, having arranged more than $2 billion in small business funding for thousands of companies throughout the U.S. Biz2Credit is expanding its industry-leading technology in custom digital platform solutions for leading banks and other financial institutions, investors and service providers in the U.S., India , Australia and Canada.