Editor’s Note: This is a guest article written by Nia Pietrobruno, Content Marketer at Fundica.
Small and medium-sized businesses (SMBs) play a vital role in driving economic growth and job creation. However, one significant obstacle hindering SMB growth has been the challenge to secure sufficient financing.
Traditional banks have long been the primary source of funding for SMBs—in Canada, for example, domestic banks provided external debt financing to 64.1% of SMBs that requested funding.
However, according to a World Bank report, the world’s SMBs have unmet financial needs of $5.2 trillion per year, or 1.4 times the current lending market for such businesses. Thus far, banks have struggled to meet these businesses’ complex and rapidly evolving needs.
Amidst the challenges of skyrocketing inflation and rising interest rates, SMB customers of many financial institutions are eagerly seeking new tools and functionalities to effectively handle their finances. However, paradoxically, many of these institutions find themselves compelled to decrease their operational expenses in response to the very same economic pressures.
There is no one-size-fits-all banking solution for small businesses; each has unique firmographics, operations, and funding needs.
Fortunately, the integration of fintech and traditional banking has made it much easier for banks to offer new tools, implement digital solutions, and make banking processes more efficient for small businesses. More and more traditional banks are partnering with fintech companies to better serve SMBs, allowing them to solve SMBs’ unique funding challenges and revolutionize SMB lending.
The Challenges of Traditional Lending
For SMBs seeking financing, traditional lending often seems like the most obvious choice. However, this source of funding also boasts stringent eligibility criteria, a lengthy approval process, and limited flexibility.
From the financial institution’s perspective, investing in an SMB is risky, especially when the business does not have enough historical data to forecast its future performance. It can often be difficult for financial institutions to gather all the information they need on the SMBs requesting financing and keep track of the performance from businesses already receiving financing. There is no doubt that lending is a challenging and risky business.
It can be difficult for SMBs to qualify for loans when they do not have sufficient collateral, a lengthy business history, established credit scores, or strong financial statements.
For those SMBs that do qualify, the loan approval process may be time-consuming and prevent them from seizing timely business opportunities and meeting their urgent financial needs.
Nowadays, small- and medium-sized businesses are looking for more than a one-size-fits-all loan, so traditional lending has its downsides. However, financial institutions, fintech companies and other organizations that support SMBs have been attempting to remedy that and offer a new lending experience.
Bridging the Gap with Fintech Partnerships
The integration of fintech and traditional banking holds immense potential in addressing the challenges faced by SMBs and revolutionizing the lending landscape.
This integration can bridge the gap through:
- Enhanced Credit Assessment: Fintech platforms leverage alternative data sources and advanced analytics to assess the creditworthiness of SMBs more accurately. This approach allows lenders to evaluate factors beyond traditional credit history, providing a more comprehensive view of a business’s financial health.
- Streamlined Application Process: By leveraging fintech platforms, traditional banks can automate and digitize the loan application process. This automation reduces paperwork, expedites decision-making, and enables faster disbursement of funds.
- Real-Time Financial Insights: Fintech platforms like Boss Insights enable banks to access real-time financial data, offering a dynamic view of a business’s performance. Lenders can make data-driven decisions, leading to personalized loan products that align with the unique needs of SMBs.
- Access to a Wider Range of Financing Options: Fintech partnerships provide traditional banks with access to a vast network of funding opportunities. This expanded reach allows banks to present SMBs with a diverse range of funding options tailored to their specific requirements.
With fintech integration, financial institutions can make SMB lending more efficient and easier than ever before.
The Future of SMB Lending
Traditional banks have recognized the potential of fintech companies in revolutionizing the lending landscape. In fact, according to Synctera and Cornerstone, nearly 90% of surveyed banks and credit unions considered fintech partnerships a driving force of their growth.
They have begun forming strategic partnerships with fintech firms to enhance their capabilities and offer innovative solutions to SMBs.
According to a 2022 survey by Economist Impact, 54% of the surveyed C-suite banking executives noted facing greater competition due to digital alternatives. From the same survey, 48% of banks had partnered with fintech startups in the three years prior.
The integration of fintech and traditional banking marks an exciting evolution in SMB lending. This collaboration empowers traditional banks to leverage the technological advancements of fintech platforms, enhancing their ability to serve SMBs effectively. By addressing the challenges faced by SMBs in accessing financing, this integration paves the way for a more inclusive and efficient lending ecosystem.
As SMBs continue to drive economic growth, ensuring their access to financing is crucial. The integration of fintech and traditional banking represents a paradigm shift in SMB lending, offering a host of benefits for both lenders and businesses.
By partnering with fintech companies like Fundica and Boss Insights, traditional banks can overcome the challenges faced by SMBs, streamline the lending process, and offer personalized loan solutions. This integration is a testament to the power of collaboration, ultimately shaping a brighter future for SMBs, fueling economic growth, and fostering a vibrant business ecosystem.
Fintechs to Look Out For
Fundica: Fundica, a leading fintech platform, provides a comprehensive database of funding opportunities for businesses across North America. By partnering with financial institutions and entrepreneur support organizations, Fundica enables these institutions to share a diverse range of funding and financing options with their SMB clients. In other words, Fundica allows FIs to support even those businesses that cannot qualify for a loan, cementing their role as one-stop funding providers and DEI champions.
Boss Insights: Another fintech player, Boss Insights specializes in data analytics and insights. By integrating with traditional banks, Boss Insights helps lenders gain a holistic understanding of a business’s financial health through real-time data. This integration empowers lenders to make informed decisions and offer personalized loan products, ultimately benefiting SMBs seeking financing.