The Impact of Fintech on Small Business Loans

Traditional lenders are renowned for their rigid, sometimes ridiculous, eligibility requirements. For SME lenders, these written-in-stone checklists help prevent fraud and delinquencies. On the other hand, these provisions make it tough for SMEs to access credit. Even the few who scale the eligibility hurdle must wait forever for loan approvals.

These hassles, among other shortcomings, explain why many small and medium-sized businesses now prefer fintech lenders for their business loans. To keep up with changing customer preferences, modern loan providers are leveraging digital tools such as advanced small business lending software to offer SMEs fast, easy access to loans.

Today, we’ll go over how technology is changing how small-scale businesses access loans and some challenges with these technologies.

The Evolution of SME Lending

In past years, small businesses relied heavily on traditional banks for financing. This process was painfully slow—with piles of paperwork, extensive credit history checks, and cutthroat collateral requirements.

Since only a handful of SMEs met often unnecessary eligibility requirements, most small and medium-sized businesses, especially startups, were denied loans and left stranded.

Fintech has changed the story. SME lenders can now issue instant funds with fewer requirements and even without any physical meetings. All thanks to online banking, mobile banking, AI-based ID verification, and credit scoring model, among other tech innovations, which makes this new lending model a reality.

Lenders and loan seekers no longer have to go through the stress of in-person applications and manual verifications before loans are approved and disbursed.

This speed and convenience make loans more accessible to small businesses.

Top Tech Trends Shaping SME Lending

Let’s go over some technologies disrupting the old, traditional way SME lenders operate:

AI and Machine Learning (ML)

AI and ML are frontline drivers of the changes in how lenders qualify businesses for loans.

Whereas traditional banks rely on conventional credit scoring criteria, AI scores are based on various data points, including alternative credit scoring models, income, expenses, and even online interactions. A FICO study found that alternative credit scoring may offer a more accurate assessment than traditional credit scoring.

Unlike banks, with AI scoring, businesses with limited bank transaction history but strong financial habits can still qualify for loans.

Besides offering more accurate credit scoring, AI also helps detect and screen out fake applications, reducing lenders’ exposure to fraud.

Cybersecurity Measures

As fintech advances, cybersecurity threats are rising too. The Financial Industry Regulatory Authority (FINRA), in a recent warning, exposed scammers’ recent mode of operation—how they create fake IDs and deepfake images using GenAI tools.

To combat these threats, software developers are adding extra layers of security to digital loan management systems. These security tools, including encryption, biometric authentication, and fraud detection technology, protect borrowers’ personal data from theft and reduce lenders’ exposure to cyberattacks.

Data Analytics

Data is the backbone of fintech operations. Fintech relies on data to predict borrowers’ financial capacity and their likelihood of repaying loans if approved. This makes data analytics tools one of the most valuable features in loan management software.

The data analytics feature helps lenders make critical decisions, like loan approval, based on borrowers’ income and spending habits. Unlike traditional banks, loan software can even use utility bill payments and internet activities to assess credit risk.

With accurate data, loan management software generates precise risk assessments for each customer.

Automation

Automation simplifies lenders’ operations throughout the entire loan lifecycle—from loan origination to debt collection.

For example, instead of waiting for weeks or even longer to reach a loan decision, SME lending software can now approve loans instantly and make disbursement within hours.

Loan software can also send payment reminders, through emails or SMS and can help process scheduled periodic deductions. These features help reduce late payments, even without any manual follow-ups.

Loan software automates tasks and workflows such as document verification, credit risk assessment, and loan disbursement with little or no human interference. This reduces human errors in lending processes and significantly cuts down on operating costs.

Blockchain Technology

Blockchain technology leaves a trail for every transaction between lenders and borrowers, adding a layer of security and trust to the lending process.

Blockchain also features decentralized ledgers, which record transactions permanently, such that cannot be manipulated. This trail reduces fraud and provides evidence in case of future litigation or compliance issues.

Smart contracts, another feature of blockchain, help lenders automate the execution of loan agreements. The feature ensures all parties comply with the agreement without needing intermediaries.

What Are the Benefits of Technology to SME Lenders?

Each of these FinTech trends offers an additional advantage to SME lenders and small-medium businesses seeking funding.

Here are a few ways technology is helping SME loan providers:

Faster Processes and Decision-Making

With tech trends like automation and AI, loans are now approved in minutes—something that once took weeks. Digital software streamlines the entire loan lifecycle, handling tasks quickly and making error-free, data-driven decisions.

Custom Financial Solutions

AI-powered analytics give SME lenders insights into loan-seeking businesses’ data to customize loan products based on each business’s unique financial status.

This way, each SME gets a matching credit offer that suits its cash flow and won’t overstretch its limits.

Easier Access to Capital

Fintech lenders and digital banking providers now offer loans to small businesses that were once disqualified by traditional banks.

Even businesses without strong credit histories can now secure loans based on alternative data sources, including rent and utility payments, social network data, and text or voice recordings from customer support interactions.

More Accurate Analysis

Lenders use data analytics to assess risk and make informed lending decisions. This reduces the chances of loan defaults while ensuring SMEs receive fair and accurate credit evaluations.

Happier Clients

The ease and convenience of online loan applications, fast decision-making, real-time updates on loans, multi-channel communication, and fraud-proof security offer lenders an entirely new experience.

SMEs have never had such painless access to loans, where they can apply from anywhere and get approved immediately, even without any physical visit or paperwork.

Some Challenges Modern SME Lenders Face

Of course, technology is arguably the best thing to happen to SME loan seekers and lenders alike. But these innovations come with their share of challenges. Some are:

Cybersecurity Risks

As digital lending technology improves, cybercriminals are advancing their strategies.

Several studies have shown an increasing rate of cyberattacks and data theft. The most recent warning is the earlier mentioned FINRA alert on scammers using the new generative AI model to create synthetic IDs and deepfake images.

Limited Credit Data

Many SMEs, especially struggling startups, lack sufficient credit history. This leaves lenders with little data to assess risk and make loan decisions.

Although AI scores credit risk using alternative data, many businesses have too few records to confidently determine their credit behavior and predict their likelihood of repaying loans.

Too Much Reliance on Technology

While technology is the lifeline of digital lending services, overdependence on automated systems can be costly. In the event of a technical failure, companies that rely solely on automation may suffer huge disruptions and losses.

Besides, human oversight is still needed to handle unique cases that software may not fully understand.

Technology Advancements Keep SME Lenders Ahead of the Competition

As modern technology advances, SME lending services are following closely. Tech has significantly improved how small businesses obtain funding.

Tech solutions such as artificial intelligence, blockchain, and automation have made digital lending processes faster and less expensive.

That said, digital SME lenders are increasingly exposed to cyber threats like hacking, data theft, and cyberattacks.

As fintech improves, SME lenders have no choice but to embrace these tech trends, if they wish to survive in the competitive financial services market.