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Research [in] Brief: Fintech Lending Expands Small Businesses’ Options
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Primary issue
Online lending through fintech firms, which provide alternatives to traditional lending, has substantially expanded the finance market. These firms are now a significant source of financing for small businesses and businesses denied credit from traditional lenders, resulting in a larger range of businesses able to obtain financing.
Key findings
Nearly half of all fintech borrowers are unlikely to have received credit from banks, and most are younger, smaller, and less-profitable businesses than those that obtain funding through traditional lending options.
Fintech firms are able to eliminate some of the roadblocks in bank financing, such as long wait times for decisions and difficult applications.
Small businesses that borrow from fintech lenders are much more likely to report encountering high interest rates or less favorable repayment terms than at banks. For those businesses that have other financing options, fintech lenders are unlikely to fully compete with banks without first increasing customer satisfaction levels.
The bottom line
Financial innovation has expanded small-business borrowing options, particularly when combined with the greater inclusion shown by fintech lenders. The emergence of fintech lending has made funding more available for businesses that don’t qualify for traditional funding opportunities.
However, a lack of industry regulation and gaps in borrowers’ comprehension of loan terms remain problematic. One solution lies in potential regulatory policies and firm business strategies that aim to narrow the gap between clarity of loan terms and borrower satisfaction while still allowing a broader set of small businesses to be financed.
Want to find out more? Read “The Rise of Fintech Lending to Small Businesses: Businesses’ Perspectives on Borrowing” at clevelandfed.org/wp20-11.
Related resources
The Rise of Fintech Lending to Small Businesses: Businesses’ Perspectives on Borrowing
Online lending through fintech firms is a rapidly expanding segment of the financial market that is receiving much attention from investors and increasing scrutiny from regulators. Research is only beginning to assess how fintech firms’ entry is altering the choices and outcomes of small businesses that borrow from them. The Federal Reserve Small Business Credit Survey is a unique data source on the experiences of business owners with new and more traditional sources of credit. We find that the businesses using online lenders are not representative of small and medium-size enterprise in the US. Businesses borrowing online are younger, smaller, and less profitable. Through reaching borrowers less likely to be served by traditional lenders fintech lenders have substantially expanded the small business finance market. We apply treatment effects estimators to flexibly control for composition differences in the borrowers. After controlling for compositional differences between online and bank borrower, we find that loan application amounts are generally smaller with fintech lenders; businesses that receive fintech loans expect more revenue and employment growth than those receiving a bank loan; and businesses that borrow from banks are more satisfied than businesses that borrow online, which are still more satisfied than businesses who were denied credit. These results highlight issues that the financial industry and regulators should examine as fintech lending to small businesses continues to expand.