Small businesses are the backbone of the U.S. economy. They are responsible for almost half of the jobs in the country and have created a greater share of new jobs than any other business sector in recent years. The fact remains, however, that the small and midsize business (SMB) market has long been underserved in terms of access to financing options. It’s a critical incongruity that seems to defy logic. If the SMB market is the engine that drives the economy, why aren’t lenders jumping at the chance to help them do it?
The economy of scale
The answer, of course, is their profit margin. Traditional lenders won’t make all that much money from small businesses, even when they succeed beyond their wildest dreams. It’s all a matter of scale. Large institutional lenders are hesitant to do all the work necessary for a small loan when they could do the same amount of work for a much larger – and therefore more profitable – one. This reality has forced many small business owners to turn to a credit card or take out a working capital loan in order to continue operations. There may be a better way on the horizon, though.
Fintech eyes the SMB finance gap
The SMB finance space has been abuzz recently with news of the massive amounts of investments generated by a string of cryptocurrency initial coin offerings (ICOs). It’s just the latest trend in an always tumultuous market. Two of the new ventures that have recently launched such efforts aim to create platforms that may very well revolutionize the way that small businesses seek and secure access to capital. They each take a slightly different approach, but both have the same overarching goal: to bypass banks and institutional lenders for good.
An SMB wish granted
When seeking capital, SMB owners and managers often hit roadblocks related to the age of their business, the liquidity of their assets, and the availability of collateral. In this classic Catch-22 scenario, they are denied the funds their business needs to grow and achieve stable profitability because they haven’t been stable long enough. Enter the aptly named Wish Finance.
This new SMB lending platform uses nontraditional scoring based on real-time business data to determine creditworthiness. The platform rates the SMB based on its performance metrics, approves it for necessary loans, and connects to the SMB point-of-sale system for automated repayment. In doing so, it bypasses many of the stumbling blocks SMBs face in securing financing and reassures investors by tying repayment directly to sales.
Lenders without borders
Since SMBs worldwide face the same financing challenges that exist in the U.S., another recent startup is building a decentralized network based upon the Ethereum blockchain that aims to create a global pool of lenders, borrowers, and financial professionals. It is known as the Debitum Network, and its creators expect an initial version of the service to be in operation as early as this year.
The central concept is simple. By creating a worldwide network that unites all of the parts of the lending equation, Debitum seeks to become the infrastructure for SMB lending that banks refuse to be. Prospective borrowers can use the network to engage the services of independent risk assessors and get connected to willing lenders from around the world. This would remove banks and venture capital firms as the gatekeepers to SMB financing, all while lowering costs and mitigating the risks taken by investors.
An evolving market
If these startups succeed in their stated missions, banks and traditional lenders could be left out in the cold. It remains to be seen if they will choose to cooperate with these fintech innovators in order to secure themselves a seat at the table as the SMB lending market evolves. Either way, it appears that a chronically underserved market is about to finally get the attention it deserves. What happens next may turn out to unleash the SMB sector and cement it permanently as the primary source of growth in every economy around the world.
To learn more about how technology is changing financial markets, check out Blockchain: Biggest Trade Finance Innovation Since Cuneiform Tablets?