Traditional banks, credit unions, and other non-banking financial institutions have been adopting new technology advancements and software developments mostly created by fintech startups. This phenomenon is rapidly changing the global lending landscape. Today, lenders are utilizing data and technology with the help of fintech to streamline the underwriting process, provide customized loan products, and make better lending decisions. Here are three important ways fintech has changed the lending service industry and how traditional lenders can keep up. Alternative Lending Platforms Traditional lenders have low interest rates and longer repayment terms, but stricter requirements for approval. Alternative lending options include private lending, crowdfunding platforms, and marketplace lending. Today, alternative lenders use innovative technology to review loan applications and provide quick and easy funding. Most small businesses can’t qualify for a traditional loan due to their poor or no credit history. Alternative lenders offer plenty of ways to obtain the capital an entrepreneur needs to grow his/her small business. They usually have simple and straightforward loan requirements and their loans come in many shapes and sizes. Moreover, they don’t only consider credit score, but also the present and future cash flow of a business when reviewing a loan application. Besides, fintech has made it possible for lenders provide loans to small businesses through lending marketplaces. These marketplaces will help small businesses to find and compare a variety of loan offers from multiple lenders. They can compare loans for interest rates, loan terms, loan amount and more and choose one that best fits their needs and budget. Easy and Fast Funding Most of the time, it can take banks and credit unions weeks to months to process and approve a loan. On the contrary, fintech lenders typically provide loans to businesses in less than 24 hours. They use the latest technology to review and process a loan application and provide customized credit solutions to their borrowers. Moreover, they only require a few of the documents such as credit score, tax returns, and bank statements rather than detailed financial statements or business plans. In addition, fintech lenders are more likely to loan small amounts than traditional lenders, which often include minimum lending terms. Moreover, they offer a variety of secured loan products that allow businesses to use their personal or business assets as collateral like their accounts receivables, real estate, or credit card sales, rather than borrowing on credit. All this helps in fast approval and funding. Use of Real-Time Financial Data Today, lenders can pull their borrowers’ data from several different sources to quickly determine how likely a business is to pay back the loan amount. With the help of a single API, the data are collected and analyzed within a few minutes to determine a borrower's creditworthiness and risk. The information can include financial, accounting, banking, cash flow, among other sources.
To keep up, lenders have begun to implement forward-looking data supported by numerous other data attributes to get a more detailed picture of a business, instead of relying solely upon the traditional FICO score. Raw data can be complex for financial institutions, financial API can help lenders display information and give them the transparency they need to assign more accurate risk. Financial technology is evolving, forcing the lending sectors to reimagine how products and services must be delivered. Simultaneously, progress in fintech is presently incorporating all phases of the borrower's venture with chatbot innovation, AI and ML, and automation, with more improvements, are standing out. Thus, by leveraging new data sets and innovation, financial institutions may be able to improve their product offerings, offer customized solutions, make informed lending decisions, and increase customer loyalty and relationships.
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No matter the industry, every small business owners need cash to run, survive, and grow, and although there are plenty of working capital loans available, not everyone is eligible for one. If you fail to increase your company liquid assets, you can’t pay suppliers, maintain inventory, hire talents, and invest in business growth. A Merchant Cash Advance for small businesses is a great funding option because you may not require having collateral or great business history to apply for this loan type. An MCA is an alternative to the complicated approval process and strict credit requirements for a traditional business loan or line of credit. If you’re planning to apply for a merchant cash advance and wondering what benefits you can get as a small business owner, you’ve come to the right place. In this post, we’ll share four benefits of MCAs and explain why it might be the best small business funding option for your company. Immediate Access to Capital The biggest advantage of a Merchant Cash Advance for small businesses is the speed with which you can get a lump sum of cash. As there is not much documentation that is necessary, you’ll get the cash into your bank account in as little as 24-48 hours when applying for an MCA. This is extremely beneficial when immediate funding is needed. For instance, may be you need a vehicle for your company in urgent, or you need instant money to purchase some important equipment or material to finish a job. Resolve Cash Flow Issues Sooner or later, your business may encounter some cash flow problems due to low profit, over investment, high expenses, overstocking, or too high borrowing and withdrawals. Not having sufficient funds in your business may lead to increased interest, missed opportunities, poor relationships with suppliers, restricted growth, solvency, stress, and more. A Merchant Cash Advance can help small businesses to resolve cash flow issues by providing instant cash. You can use the capital to solve short-term cash flow problems and cover day-to-day expenses. Simple and Easy Application Process Getting a Merchant Cash Advance is far easier than many of its small business funding counterparts. The application process is very simple and straightforward and you don’t have to submit endless documentation to approve the loan. Plus, if you don’t have collateral or an implacable credit score, you still could qualify. If you’re able to repay the full amount on time, a Merchant Cash Advance lender will approve your application. So, if you’re looking for a simple and easy way to secure small business funding for your company, a Merchant Cash Advance might be your best option. Use Money for a Variety of purpose Most of the small business loans come with restrictions on how you utilize the amount. For example, equipment financing can’t be used for hiring talent, SBA 504 can’t be used to purchase inventory, and microloans can’t be used to buying real estate or paying off debt. With such restrictions, it can be challenging to find a small business financing option to meet your business’ financial needs.
However, with a Merchant Cash Advance for small businesses, you can use the money wherever you’d like, from expanding the client base to marketing, buying equipment, investing in real estate, hiring talent, and expanding to a new location. Bottom Line It can be challenging to secure small business financing if you have bad credit history. Fortunately, a Merchant Cash Advance focuses less on your credit score and lets you secure funds in the least possible time. You can leverage the benefit of an innovative and intuitive online lending platform to find and compare a variety of MCA loan offers sold by multiple lenders. Related tags #MerchantCashAdvance, #SmallBusinessFinancing, #SBALoans, #CashFlowProblems, #CashAdvanceLoans, #MerchantCashAdvancelenders For years, 5Cs and FICO scores have played a significant role in credit decisioning. Most lenders rely on FICO to determine whether or not to approve a business loan. It is also used to set interest rates, loan amount, and repayment terms.
In the past, FICO scores were commonly used by banks, credit unions, and other financial institutions to assess the creditworthiness of borrowers. These scores typically range from 300 to 850. The higher scores are given to business owners who’ve handled debt in the past and probably continue to do so. Business owners lose the most points for making poor financial choices in the past, missing payments, or filing bankruptcy. Just because a business has an 800 credit score, it doesn’t mean their loan application will be approved by the lender. It’s just one important factor in a bank’s lending decisions. During the pandemic, the risk management tools used by lenders proved to be sadly insufficient. While the biggest national banks continue to rely on old-school credit scoring methods, new digital and alternative lenders have started experimenting with new and innovative methods for underwriting credit risk. Besides the FICO score, these lenders also consider other important factors such as cash flow predictive data, spending behavior, and other alternative variables to make better lending decisions. Here are some important reasons why a perfect FICO score isn’t enough and why you should try an alternative to FICO. First, The 5Cs and FICO score doesn’t reveal an accurate picture of a business's financial health. Millions of aspiring and existing entrepreneurs may need extra cash for a variety of purposes in their businesses. Besides, it’s extremely difficult to determine the creditworthiness of borrowers based simply on historical data or those who have just started their new venture and don’t have a credit history yet. Lower prices, higher supplier costs, lower sales, intense competition, industry changes, government regulations, natural disasters, and the pandemic are some of the many factors that can reduce a borrowers’ ability to repay the loan amount. Since a credit score doesn’t contain items like income, expenses, cash flow, and anything about the business’ future ability to repay, historical data is not enough to make better and intelligent lending decisions. Thus, a FICO score of business owners may not be an indicator of whether they can afford to take on additional debt. Second, a FICO score won’t tell if a business is struggling with cash flow issues or seeing its revenue dip in the public-health crisis or a pandemic. FICO scores use credit bureau information, which includes items like debt payments and balance history. It doesn't contain items like a business’ revenue, income, expenses, or it won’t tell if a business is still running or has been closed. If a business has too much debt relative to income, it could be declined. Third, cash flow matters. From the last few years, lenders are realizing the benefits of cash flow predictive data in providing loans to businesses. Earlier, financial institutions were obsessed with FICO scores. If a business has a high credit score, it could borrow an almost unlimited quantity. However, FICO is mostly a measurement of whether or not a business is making payments on time. New lenders are looking increasingly at cash flow predictive data in their underwriting. A cash flow analysis of a specific period gives the lender an idea of how much debt a business can successfully handle and how much cash is left to be reinvested into the business. It helps lenders to determine a business's financial capacity to repay the loan. Simply, a positive cash flow indicates lenders that a business will be able to pay back the borrowed amount, so there’s no risk in providing capital, and vice-versa. Fourth, and finally, the risk associated with the borrower. If a borrower is looking for a business loan, their ability to make repayments on time would be a great indication of risk. However, the FICO score won’t tell this to lenders. If a business is responsible and closes credit cards that they no longer want, they can be punished by FICO. If someone has positive cash flow but a lower profit, FICO doesn’t consider this. Besides FICO scores, other signals are also more important in credit decisioning. Today, lenders can access, analyze and use the most robust, accurate, and real-time data of their borrowers to reduce credit score, determine creditworthiness and make smarter lending decisions. Some FinTechs like Codat, Validis, and ForwardAI provide financial data APIs that enable lenders to collect data from multiple sources such as accounting, cash flow, banking, eCommerce, and other financial systems. Combining these new data points with historical data, lenders can develop new credit scoring models to provide fast and easy loans to their customers. Sources: 5 Reasons New Lenders Are Ignoring FICO Credit Score | Forbes How are FICO Scores Different than Credit Scores? | myFIC |
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