Fintech Lenders Can Help Capture Small Business Opportunity - Here’s How
Since 2021, U.S. entrepreneurs have submitted five million new business applications per year, according to the U.S. Census bureau. And in 2023, the number of new small business formations increased by nearly 9% compared to the previous year according to a 2024 Equifax Commercial Trends report, suggesting that the growth of the small business sector shows no signs of abating. This creates a massive opportunity for fintech lenders.
When seeking a loan, small businesses will often look first to their depository bank. That’s natural when you consider that a relationship of trust is already in place as well as the depository bank also having a lot of data on the small business. Fintechs, however, have an opportunity to approach small businesses from a different angle. The best way to do this is by offering a superior lending experience, which could include a simpler application process, faster decisioning and funding, and a more flexible credit box that enables the approval of candidates that were declined by their depository bank.
“With small business default rates up 80 basis points year-over-year as of July 2024, lenders need the best available information to pursue a high volume of loans that also fit within their risk parameters,” said Jake Osborne, Senior Vice President and General Manager of Fintech and Payments, Equifax. “From equipment loans to working capital credit lines, the opportunities for fintech lenders are substantial in the small business market, but they must have safeguards in place and do their due diligence using the most up-to-date technology and methods.”
Providing an improved customer experience while managing risk requires embracing technology. Luckily, fintech lenders have a greater array of data and analytics resources available to them than ever before. These tools can help better identify quality leads and securely vet and onboard new loans. They can also assist with business verification; provide comprehensive risk scores that assess business viability; and aggregate and consolidate data from many sources, as well as leverage alternative data such as merchant commercial data.
Alternative data, such as merchant commercial data, is a critical tool for fintech lenders, as this data can show lenders if a small business has been accepting payments or has any refund or chargeback issues that indicate a problem. For example, small businesses that have sustained chargebacks greater than 1% of sales, have nearly double the average default rate, according to recent Equifax Data & Analytics Commercial Merchant Data.
As data and analytics providers have expanded their initial focus to encompass small businesses, fintech lenders have a world of information at their fingertips. Small businesses continue to be an economic engine for the economy–and a significantly underserved group–meaning that the potential for fintech lenders is greater than ever. By learning about and harnessing evolving data and analytics tools, fintechs can continue to provide an essential service to individuals, businesses, and the larger economy.
To learn more about Equifax Fintech products and solutions, go here.