Trends in Online Financing Platform for Small and Midsize Businesses (SMBs)

The online financing platforms offers faster, streamlined application processes and different types of loans to the Small and Midsize Businesses (SMB). The lenders with clearly stated terms can give SMBs more flexible ways to jump-start their businesses, smooth out cash flow and fund new opportunities through the online financing platform. The technology-powered marketplace lending acts as a mechanism for allocation of capital between borrowers and lenders. This has reduced the need for physical infrastructure and boosting convenience and automation, increasing efficiency, lowering manual processes, and improving the overall experience of borrower and lenders. The proprietary technology platform supports the marketplace, automates key aspects of its operations that include the borrower application process, credit decision-making and scoring, data gathering, fraud detection, investing and servicing, loan funding, and regulatory compliance. The adoption of digital technology like big data analytics and technology-enabled lending/financial platform will boost the financing demands of SMBs.

One of the biggest challenge faced by the SMBs is the lack of comprehensive infrastructure. Many of the SMBs still operate within the unorganized space. They are often denied financing despite being credit worthy. The lack of basic platforms is making it difficult for SMBs to compete with the strong players in the market. This requires the technology/platform providers to be well equipped to capitalize on this potential. Thus it is important to understand the need to invest in digital technology to meet the financing demands of SMBs.

Adoption of Big Data Analytics

The modern digital economy is increasingly being underpinned by information and data that helps us to infer that SMBs should embrace big data opportunities.

The online financing platform like P2P lending revolution hinges on big data wherein insights are harvested from vast quantities of data. Big data helps in looking for new sources of data to validate the income, employment, and identity of the borrowers. It keeps a track of the different borrowers that include the sales volume from credit cards, local and government public records, and accounting records from small businesses. It also makes use of predictive modeling, data aggregation, and electronic payment technology to provide loans online to SMBs. Such technologies are driven by innovative software and data metrics that also includes social media interactions.

Big data helps in the creation of the unique online lending credit score. The credit score rating model helps in analyzing the risks involved in providing finance to the SMBs. The creation of pre-determined algorithms helps in analyzing the scores of the borrowers and the characteristics of each loan and automatically allocate the loans. Algorithms are modified over time based on the results, changes in trends, and other conditions. The model is derived from a combination of the answers received from a borrower’s application, credit reporting agency or Fair Isaac Corporation (FICO) score.

Many of the marketplace lenders are providing business loans to the SMBs that is powered by machine learning that helps the SMBs to view and compare the right loan. This will help in growing the business without working with the traditional banks. Many players also make use of in-house technology tools that is based on big data analytics and machine learning algorithm to evaluate the client’s business.

The credit scoring model helps in determining the loan grade, thereby indicating the level of the risk factor involved in the loan. This helps them in determining the interest rate of the loan. Banks have access to a variety of risk data that is available on the online platform. This is done through the use of application program interfaces (APIs) that is being used by online lending funds. More accurate underwriting helps lenders issue more loans and better manage credit quality. Big data scoring can improve the predictive quality with better in-house scoring models.

Big data analytics will help SMBs choose the right loan through the platform. Big data analytics help in collecting the data of SMBs for analyzing the risk and return involved along with offering results for the appropriate solutions as per each SMBs requirements. These help SMBs to determine which lender to approach for the best possible deal, and vice versa.

Technology-Enabled Lending/Financial Platform

The technology-enabled financial platform is a proprietary end‐to‐end lending platform that provides faster access to finance loan to SMBs. The financial platform has software tool that aggregates data about the business’ operations that runs an algorithm to determine loan eligibility. The proprietary credit scoring models in the platform evaluate the financial health of SMBs. The software analyses thousands of variables such as cash flow metrics from social media and provides a cumulative score. The platform helps in lending/borrowing money and interacting directly with each other. Members decide their own interest rates and no banks are involved in the whole process.

The platform provides predictive indexes that are based on the access to current cash flow data from the bank accounts and the QuickBooks entries. The platform helps in automated collection of Automated Clearing House (ACH) payment from borrowers sometimes as often as each business day. These online platform allows the borrowers to write their own loan applications and link to their Facebook and LinkedIn accounts to verify their identity, educational background and work history.

The online P2P lending platform allows companies to borrow against unpaid invoices to fund the working capital needs of SMBs. For instance-The large institutional investors provide working capital to SMBs by acquiring their unpaid invoices. These platform provide supply and demand based online marketplace for debt financing, which works with minimal intervention from lenders. The online platform connects the lenders directly with SMB borrowers through an innovative affinity-based marketing strategy and flexible online bidding platform.

Platforms will explore tie-ups with other technology providers to bolster various online financing platform models. The platform allows end-users to restructure and refinance their distressed debt. By partnering with banks, collection companies, debt settlement agencies, and others, the lender acquires and on boards borrowers that are currently in default, offering them a new loan financed through these marketplace platform with accredited and institutional investors. The platform ensures proper use of analytical skills in the lending review process. Therefore, the participants in the market are focusing on the consolidation so that they can create a better online platform for the lenders and borrowers thereby bringing efficiency into the system.

Benefits

? Alternative lending options make use of proprietary technology and algorithms for more accurate and efficient lending decisions.

? Technological models will help business to utilize the real-time underwriting technology to restructure their risk patterns and to provide flexible lines of credit to SMBs.

? The dependency of lending platforms on low interest rates helps in stimulating high volume transactions.

Challenges

? Inefficient proprietary risk-scoring models of lending platforms.

? Lending platforms have limited operating history. The SMBs lack high-quality collateral and long credit histories and are associated with higher risks.

Key Takeaways

? Improving the credit reporting systems for SMBs will help lower the risks for the lenders.

? Proper management of data and risk, improves the credibility of SMBs aided by technological platforms.

? Lenders make use of powerful algorithms that can analyze data from social media, mobile and bank transactions to come up with improved underwriting models. These models helps in automating results, quick decision making and minimizing credit risk.

? SMBs expect to have faster approvals during the time of the borrowing. The financiers are focusing on different borrowers who can connect with themselves thereby improving the responsive services by making it transparent and user-friendly. The SMBs who are under banked and underserved are provided tailored solutions that include, credit scoring, good underwriting practices, and expert risk modeling. The financiers are also providing new tailored innovative and customized lending options for its customers that suit their current needs.

What is to be done?

? Implement a strategy to cover big data analytics within the technology and business landscape.

? Provide more improved and accurate underwriting models, collateral information and management systems to make underwriting decisions, analyze, and manage loans more efficiently.

? SMBs need to understand their network partners and dependencies like the competitors, customers, investors, lenders, markets, and suppliers. Therefore new tools will offer SMBs systematic, real-time 360 views to assess and make decisions on these inter-dependencies to get the benefit of their operations.

? The policymakers and regulators should focus on the macro-prudential risk across the financial system.

? Figure out means to facilitate cross border investment, financing/lending, fundraising through innovative online platforms.