Is FinTech a Better Alternative Lending Option to Traditional Banks?

By February 29, 2016Fintech

Is FinTech the Better Alternative Lending Option to Traditional Bank Lenders?

When it comes to small businesses, yes.

Compared to large, established businesses, small businesses often encounter financing challenges with traditional bank lenders. This is due to factors like increased regulations since the 2008 economic downturn, higher risk adversity than alternative lenders, and stricter qualifications.

Here’s an example: many traditional bank lenders won’t even consider loan applications from small businesses younger than 2-3 years. To top it off, the wait doesn’t guarantee loan approval. In fact, recent data shows that only 20% of small businesses who apply for a loan get approved by traditional bank lenders.

That’s where FinTech comes in.

What is FinTech?

FinTech is a financial revolution fueled by technology and progressive vision. For small businesses, it provides an alternative lending solution to traditional bank methods, making it easier for young and mature startups to get business financing. Thanks to the FinTech revolution and the popup of alternative lenders, significantly more small businesses are getting approved for funding.

How FinTech Alternative Lenders View Risk

When traditional bank lenders consider applications, they measure hard numbers like credit scores, or how many years you’re in business or how much capital you have. Alternative lenders, on the other hand, go beyond the numbers and views each applicant as an individual. They understand that credit scores don’t always paint a full picture and is not a sole determinant in turning away a loan application. For example, alternative lenders know that one reason borrowers may have a lower score is simply because they used more than 30% of their available credit on their credit card.

With a better understanding of all the different reasons a person’s credit score can be low, alternative lenders have used FinTech to approach creditworthiness in ways that traditional lenders have not. Here’s how:

1. Alternative lending solutions cut ‘the red tape’

In addition to many compliance regulations, traditional lending institutions aren’t set up for infrastructure change. It could take months to implement any progressive technology or process, and sometimes, implementations eventually get dropped due to the many layers of approvals needed.

FinTech, on the other hand, is a startup culture at heart. Alternative lenders work hard and fast to turn over traditional lending assumptions to meet today’s market needs.

2. Looking for new alternative lending solutions

As mentioned earlier, credit scores can be misleading. With vast technology expertise, alternative lenders have the capabilities to challenge the traditional lending model. Combining creativity with technology, FinTech opens up the search for a better lending model that can help broaden the scope of credit-approval.

With the emergence of free and accessible data, alternative lenders found they can get a better, more holistic understanding of loan applicants. Using big data allows lenders to lend more freely, rather than being constrained to lend solely on the basis of credit score.

Rethinking lending industry assumptions

FinTech and alternative lending have already made great strides in the ways lenders approach risk but change is just getting started. As borrower profiles and market demands change, FinTech companies will continue to search beyond traditional lending practices and bring borrowers the most innovative and best-matched possible products and services.