How Fintech is Revolutionising Business Loans
The landscape for Business Loans in UK has changed significantly in recent years. These changes are being driven by a number of fintech financial lenders – such as Funding Circle, Nucleus, Iwoca, Bibby, Fleximize and Ultimate Finance – who provide so-called ‘alternative finance’. Many businesses are attracted to these lenders because they offer a more flexible approach than many high-street banks; and others by the fact that their fully digital application processes are perceived to be simpler.
Many businesses are dependent on being able to access finance in order to continue trading, but it’s not hard to imagine how the events of the last year and a half have made the idea of lending to some business sectors a riskier proposition. Even businesses with a long-standing relationship with their bank have, in many cases, seen a loan application refused recently. Although the Government has launched some high-profile loan guarantee schemes to support businesses affected by the pandemic, the number of participating lenders was perhaps lower than many people had anticipated. As the banks start to exercise more caution in business lending, the fintech lenders have stepped in to fill the gap.
HM Treasury estimates that the UK fintech sector boosts the UK economy by £7 billion. Accountants and business consultants Deloitte say that London has the largest fintech economy of any city in the world.
Only a few years ago, terms such as crowdfunding and peer-to-peer (P2P) lending had not entered the public consciousness. Now, these markets have increased massively in recent years, and this growth looks set to continue for the foreseeable future. Businesses that have used crowdfunding have frequently been able to access funding in a matter of weeks and therefore get their products and services to market much faster than would otherwise have been the case. There are so many entrepreneurially minded businesses out there, with fantastic ideas, and anything that helps them to realise their goals must surely be welcomed.
The fintech lenders have also changed the way business loan applications are assessed. These lenders are not all exclusively focussed on modern innovations such as P2P, and usually offer more traditional business loans as well. However, instead of the usual high-street bank manual underwriting approach, the fintechs typically use artificial intelligence and machine learning technologies when deciding whether to approve an application. Indications are that this all leads to an improved chance of acceptance, a swifter application process in today’s ‘instant consumer society’ and, perhaps most importantly, high levels of customer satisfaction.
Because fintech lenders use simple automated decision-making processes, they can usually keep their overheads to a minimum. These cost savings are then passed on to business borrowers in the form of lower interest rates.
All of these changes have the potential to massively benefit the UK economy. We’ve already seen how much the fintech sector itself contributes to the nation’s prosperity. Now also consider that small and medium sized enterprises make up such a large proportion of the UK business community. The Federation of Small Businesses says that 99.9% of businesses in this country are SMEs, and that collectively they employ 61% of the nation’s workforce.
Furthermore, in recent years, between 500,000 and 700,000 start-up businesses have been established each year; but the Centre for Entrepreneurs own analysis of Companies House data reveals that as many as 772,002 new businesses were registered during 2020. These are companies that, inevitably, don’t have an established credit history that a bank can use to decide that lending to them would be a safe bet.
This all emphasises how vital it is that SMEs have access to the finance they need – how many of these start-ups and established SMEs would have missed out on vital funding if there was nowhere else to go when the banks rejected their applications?
If one thing above all else illustrates the success of these alternative models, it’s that so many banks and credit unions are now entering into partnership agreements with fintechs to provide alternative lending solutions. Lloyds Banking Group’s outgoing CEO António Horta-Osorio promised to “increasingly use partnerships with specialist technology and fintech providers” when be unveiled the bank’s 2021 financial results. All of the ‘big five’: Barclays, HSBC, Lloyds, RBS/NatWest and Santander, signed up to the ‘FinTech Pledge’ in 2020, meaning that they committed to a series of global standards for “efficient and transparent commercial partnerships between banks and fintech firms”.