With the coronavirus crisis shutting down thousands of small businesses and driving unemployment to new heights, fintech lenders argue they will have a key role in trying to revive this critical segment of the economy once the immediate public health crisis is over.
“We in the private sector and the public sector need to come together really, really quickly to make sure the economic recovery and the public health recovery are as smooth and easy as possible,” said Sam Taussig, head of global policy at alternative lender Kabbage. “It will really be hard to recover from the public health crisis if people don’t have jobs and health insurance.”
For the past decade, financial technology lenders have found a niche providing capital to small businesses, particularly those that don’t qualify for bank loans. While some alternative lenders themselves might not survive the economic crisis, the industry says it has tools critical to helping small businesses recover.
Demand High for Emergency Loans
The U.S. Small Business Administration’s disaster assistance loan program has already started accepting applications from small businesses affected by the coronavirus crisis. The SBA had received about 40,000 applications nationwide as of March 23. A spokesman for the SBA’s Massachusetts district office said in an email that the number of applications from Massachusetts’ businesses was not available.
Loans typically take three to four weeks to process, but the SBA is expecting longer time frames due to a high volume of applications. A pilot program, the Express Bridge Loan, was launched on March 25 to let existing borrowers who have a relationship with an SBA–approved lender – typically a traditional bank – apply in the meantime for a bridge loan.
“It’s designed to supplement the SBA’s direct disaster loan capabilities and authorizes SBA Express Lenders to provide expedited SBA-guaranteed bridge loan financing on an emergency basis in amounts up to $25,000 for disaster-related purposes to small businesses while they apply and wait for long-term financing,” Massachusetts District Director Robert Nelson said in an email.
Crises Creates Challenges
Not all small businesses qualify for SBA loans. Traditional banks often don’t lend to all small businesses, either.
Big banks in recent months have approved about 28 percent of small business loans, while lenders with total assets less than $10 billion have approved about 50 percent of loans, including SBA loans, according to the Biz2Credit Small Business Lending Index.
This pattern created an opening in the market for non-traditional lenders that used algorithms and a wider variety of data sources to step in and provide more small businesses the financing they sought, including companies like Kabbage, CanCapital, OnDeck and Boston-based Forward Financing.
Alternative lenders in recent months have approved more than 56 percent of small business loan applications, according to Biz2Credit, a fintech platform connecting small businesses with lending sources.
But because many small businesses have existing debt, obtaining bridge or disaster loans would place additional burdens on these companies, possibly leading to loan defaults and bankruptcies.
David O’Connell, a senior analyst with Boston-based Aite Group, said this could lead to new problems for alternative lenders.
“Since alternative lending started only about a decade ago, they haven’t been through a downturn,” O’Connell said.
Alternative lenders, particularly those with lower–quality services, could see private equity investors pull out of small business lending and move their money elsewhere. This would leave fintechs with less capital for lending.
‘The Biggest Opportunity’
Biz2Credit CEO Rohit Arora said some alternative lenders could lose investors. But he sees the current crisis as an opportunity for fintechs to work with the federal government on their loan initiatives. He said fintech tools can analyze small business cash flow, watch for trends and manage risk – all critical when lending federal money.
“It’s the biggest challenge alternative lenders have seen after the 2008 crisis, but it can also become the biggest opportunity that financially sound alternative lenders can have,” Arora said.
Kabbage’s Taussig and others have been lobbying Congress to give alternative lenders a role in distributing SBA loans via provisions in the $2 trillion federal economic aid package that as of Banker & Tradesman’s deadline was expected to pass into law at the end of last week.
As written, the bill authorizes the U.S. Treasury Department to make rules that would allow fintechs a role in distributing these federal loans, Taussig said.
Since some small businesses have less than two weeks of liquidity and many others have less than a month’s worth, Taussig said there’s an urgency to providing capital to stabilize these businesses and later help them grow.
Fintechs are well-situated to contribute in some way, he said, whether through lending or in other ways partnering with community banks and credit unions that are helping small business customers.
One fintech has already been preparing to help community banks and credit unions process the surge in SBA loan applications.
Boston-based Numerated announced a CARES Act lending solution Thursday, named for the federal economic aid legislation, which is expected to include another $350 billion for SBA loans. Numerated’s business banking platform already supports SBA lending, and the fintech’s new tool incorporates criteria specified by the CARES Act, providing banks and credit unions with digital and automated processes to handle the loans.