skip to Main Content

Alternative Fintech Funding: A Cautionary Tale

  • Financial technology options can be an appealing option for entrepreneurs who have trouble accessing funding through traditional lenders
  • However, fintech can also come with higher interest rates and more onerous repayment terms
  • Proceed with caution when looking for financing

By Denis Jakuc

Fintech, a term which has become more widespread in the business community, is simply an abbreviation of the term “financial technology.” It can be applied to any technology-based innovation that changes how people financially transact business.

Financial technology originally referred to the use of computer technology to speed up back-office processing for banks and trading firms. But since the mobile internet/smartphone revolution, fintech applications have exploded to include everything from online banking and credit card payment services to cryptocurrency and blockchain systems set up to manage a range of activities, from monitoring supply chains to tracking music royalties.

Fintech applications have now become part of our everyday lives. For example, they allow you to use your smartphone to deposit a check, apply for credit without visiting a bank, make money transfers, and manage your investments—all, generally, without the assistance of a human being.

Fintech has also had an impact on startups and expanding small businesses. Alternative online lenders have appeared who use the technology to provide small business loans more quickly and conveniently than traditional banks.

The opportunity for these fintech lenders came out of the credit crisis of 2007-2009, which resulted in Congress passing the Dodd-Frank Act of 2010. This law limited the risk that banks could carry on their balance sheets. Consequently, traditional lenders tightened their standards and required small businesses to meet stricter criteria to qualify for a loan. This lowered the lending risk for the banks, but also limited access to loans for small businesses.

Enter the fintech lenders

This situation forged the development of the alternative fintech lenders. Since they aren’t banks, they’re not subject to Dodd-Frank regulations. This means fintech lenders can readily provide funding to small business borrowers who might be turned down by banks because they lack capital, don’t have much of a track record in business, or present a higher lending risk for other reasons.

In addition to providing access to funding, alternative fintech lenders could also offer small businesses some appealing features banks weren’t providing, including: the convenience of completing the loan application process online; a wider range of loan options; flexible underwriting standards; and a faster process for approving loans and getting borrowers the needed funds.

Proceed with caution

The downside to all this is that alternative fintech lenders will often charge exorbitantly high interest rates and subject borrowers to onerous repayment conditions, such as requiring more frequent payments and only offering very short loan terms. Plus, borrowers are taking the chance they may not be dealing with firms that are as reputable as traditional lenders, precisely because alternative fintech lenders are not regulated like banks.

InnovatorsLINK advises small businesses to exercise caution with alternative fintech lenders. The higher interest rates and more severe loan terms can quickly put a drag on operating budgets. We also feel that the lack of regulation provides less protection for the small business. In line with this, we’ve advocated for improved regulation of alternative fintech lenders.

Finally, we need to point out that banking laws have begun to change, eliminating some of the effect of the Dodd-Frank bill. It is now much easier to borrow from traditional banks. Credit standards have loosened and the federal government itself is providing a variety of small business funding options through loans issued by banks and guaranteed by the U.S. Small Business Administration (SBA).

Lastly, many of the fintech conveniences, such as online applications and faster loan processing, are now being offered by traditional banks.

 

If you’d like more help with finding the right solution for housing your startup, InnovatorsLINK offers a detailed Bootcamp course where you’ll learn the details about all your options. Register here

Review the Executive Summaries associated with each course prior to attending the courses.

This Expert Summary is © InnovatorsLINK. For republishing, please contact dlangeveld@innovatorslink.com.

Spread the Word

More To Explore

Expert Summaries

Know Your Competitors

By Denis Jakuc 

There are tons of benefits to knowing who your competitors are—what they’re offering, their strengths and weaknesses. That knowledge can help you make your products and services stand out,

<< back to all articles

Latest from Business Insights

Join with Free InnovatorsLINK Account

Start accessing all the free member benefits and valuable content on the InnovatorsLINK platform. Create a BizLINK listing to boost brand exposure, receive the weekly Main Street Journal newsletter, engage in forums, get full access to free content, and more.