As children, our exasperated parents would often dismiss our pleas for new toys or books with this admonition: ‘kids, money doesn’t grow on trees’. In the world of commerce, banks respond with some variation of this dismissal, when approached by small and medium businesses with financing requests. However, with the advent of online lending and online finance, this is slowly changing. Small businesses and ‘traditional’ lenders Small businesses are at a disadvantage when it comes to applying for loans from traditional lending institutions like banks. Here are a few reasons why:
- Lack of collateral: In order to be eligible for loans, banks require businesses to provide collateral, or assets that can be claimed should the borrower default on their loan repayment. Typically, collateral such as land or property isn’t something that small businesses—particularly recently established ones—possess.
- Insufficient cash flow: Banks want to know that a business has enough money to make its loan payments on time and on schedule. Often, small businesses are unable to demonstrate sufficient reserves of cash because they have to pay their suppliers or vendors upfront, as well as foot other expenses such as salaries and rent.
- Small loan amounts: Small businesses, quite understandably, want smaller loan amounts than large companies. Banks, on the hand,are willing to bear the expense of processing large loansfor big businesses—rather than small loans which are similarly expensive to process—because they are more profitable.
- Inadequate documentation: Small businesses lack same the infrastructure and financial know-how as their larger counterparts. They are often unaware of the different kinds of documentation they need to provide when applying for a loan, and don’t maintain records as meticulously.
Alternative lending options Luckily for small businesses, so-called ‘non-traditional alternative lending’ options are now available. One such alternative option is online orP2P (peer-to-peer) lending. P2Psor alternative marketplace lending platforms, as they are also known, began to emerge as a viable funding option in the mid-2000s. They are now an established, global phenomenon. Who can apply? Non-banking Financial Companies (NBFCs) cater to segments that the banking system overlooks, such as students, consumers, start-ups,and small businesses. Many of these NBFCs are start-ups themselves. No credit score? No problem! Lack of a credit history is one major reason why small businesses find it difficult to successfully apply for loans. According to Instakash founder GaurangSanghvi, who started his business after he was a denied a loan for similar reasons, out of a population of 2 billion, only 200 million Indians have a Credit Bureau of India Ltd (CIBIL) rating. To address this disparity, Indian NBFCs like LendingKartutilise data analytics to compute, calculate, and determine their clients’ creditworthiness, and provide them with loans. LendingKart’s in-house analytics team collects data which includes their clients’ online financial activities or ‘footprint’ to formulate a score.Their clientele includes sellers on online marketplaces like Flipkart and Amazon. ‘Disruptive technology’has made an impact on the ‘loanverse’ as well, and is helping to level the field for small and medium businesses. NBFCs in particular, are now making it possible for a whole new generation of SMBs to finance and manifest their dreams.