The Comparison of Different FinTech Lending Models and Products for MSMEs

Snippet: This guide compares different fintech lending models and products for MSMEs and highlights their execution challenges for fintech companies.

Fintech lending is a game changer for MSMEs. It offers flexibility to MSMEs to choose from different lending models as per their risk level and ease of repayment. This article looks at these other fintech lending options tailored for MSMEs. We’ll compare their features, benefits, and challenges so you can understand how it all works and how MSMEs can make informed decisions to choose the suitable model going forward. Let’s get started.

Types of Fintech Lending Models for MSMEs

Peer-to-Peer (P2P) Lending

P2P platforms connect MSMEs directly with investors. This is the most popular lending model among startups. By 2024, an estimated $139.82 billion (the highest) will be raised through the P2P lending model, among other lending alternatives. MSMEs from different socio-economic backgrounds can avail of small-ticket loans at low interest rates, bypassing traditional banking structures. The application process is pretty straightforward, and approval times are quick. However, the availability of funds can be less predictable as it relies on individual lender interest.

Invoice Financing

In this model, MSMEs can borrow loans against their unpaid invoices. The credit line grows along with the size of the invoice. It provides MSMEs with immediate cash flow to manage their short-term liquidity needs. Businesses with consistent sales can easily avail of such loans, provided their clients have respectable credit ratings.

Merchant Cash Advances (MCA)

MCAs provide funds based on future credit card sales. They are quick to arrange and don’t require traditional collaboration. However, they can be more expensive than other forms of lending. That’s because repayment is a percentage of daily sales, which might fluctuate.

Line of Credit

This model offers MSMEs the flexibility to borrow in increments, repay the loan, and borrow again until the line remains open. Usually, the line stays valid for at least three years. So, MSMEs don’t have to go with a new application for every withdrawal. Interestingly, you only have to pay interest on the amount used. It’s best for MSMEs looking to manage working capital and unexpected expenses.

Point of Sale (POS)

Fintechs can offer POS financing to MSMEs at the point of purchase for big-ticket items such as cars or furniture. Due to technological advancements, MSMEs can clearly see installment loan options and other terms online (even from a mobile) to make a quick decision.

Captive Lending

Fintech companies can create their own subsidiary companies to offer quick financing to MSMEs. This is called Captive lending. A captive finance company can offer a store credit card and full-scale banking to MSMEs while limiting the amount of risk exposure to its parent company with ease.

Comparison of Fintech Lending Models:

Fintech Products Tailored for MSMEs

Digital Microloans

These are small, short-term digital loans for MSMEs who need quick, low-value funding. The best part is such loans are easy to apply through digital platforms like mobile phones. As the process is paperless, it takes less time to process and disburse. However, interest rates are high for smaller amounts and short-term loans.

AI-based Credit Scoring Models

Under this model, fintechs use AI to access the creditworthiness of MSMEs in minutes. Thus, loan approval takes very little time if the borrower has a good credit score. According to a KPMG report, 70% of finance organizations have already begun AI implementation. However, if a new company has a limited credit score, the model considers other factors to make the decision. For instance, the model may review non-traditional data like online sales, social media presence, and transaction history to create a holistic evaluation.

Blockchain-enabled Financing

Here, the lenders use blockchain technology to facilitate secure, transparent, and efficient loan processing models. As no third parties are involved, MSMEs can access loans at meager interest rates. The system adds the electronic signature of both parties to clarify their agreements to the transaction, prevents duplicate transactions through distributed conscious technology, and facilitates rational decisions made by the participants to provide an operational economy. However, its adaptation may pose an operational challenge for rural MSMEs needing to be updated with blockchain technology.

Crowdfunding platforms

Crowdfunding platforms enable MSMEs to raise funds directly from many investors through a digital platform. Crowdfunding is the best model for rapid fundraising without going through traditional finance processes. This underscores why the transaction value of a crowdfunding campaign in 2024 is expected to reach 1180.5 million USD.

Comparison of Fintech Products for MSMEs:

Various lending models cater to the immediate financial needs of MSMEs. While some models offer lower interest rates, others require a healthy credit score to qualify the minimum bar. MSMEs need to have

Challenges of Fintech Lending for MSMEs from the Fintech Firms’ Perspective

MSME lending powers fintech companies to acquire previously underserved markets with innovative product lines and tech-driven solutions. However, it also comes with equally unique challenges to capitalize on these opportunities effectively. Here are some of the significant challenges:

Risk Management

AI and machine learning can help fintechs analyze alternate data of MSMEs. But, unless they are trained on data representative of the diverse range of MSMEs, it’s not wise to expect wholly accurate predictions. Also, Fintechs would often be required to continuously adapt and retrain their AI models to adapt to the rapidly changing business environments of MSMEs in niche markets or those operating under unique business models.

Regulatory Compliance

Financial regulations keep changing for every industry, including for MSMEs. Adapting to these evolving regulations to offer lucrative finance products for MSMEs is an excellent challenge for fintech lenders. They also face cross-border data transfer challenges to maintain compliance with international data protection laws like GDPR in Europe or CCPA in California.

Fraudulent Check

Checking the authenticity of MSME borrowers helps fintechs detect red flags early and easily avoid potential risks. However, verifying authenticity from documents such as bank e-statements, ITR-V forms, and Form 26 AS forms is tiresome unless fintechs have reliable technical tools for analysis.

End Thoughts

Fintech lending has reshaped finance for small businesses, providing more accessible funding yet navigating risks as regulations and technology evolve. However, they must evolve continuously to keep pace with changing regulations, market terms, and MSME requirements for successful market domination. This guide will help you understand the risks and mitigation strategies of fintech lending in great detail.