Starting and running a new business can sometimes be a dreaded and tedious task often down to cash-flow challenges entrepreneurs will come across in the process. Research suggests that about 82% of new business will fail because of cash flow management or the lack of knowledge or adequate skills to successfully overcome the cash-flow hurdle. Even though an entrepreneur may be filling a gap in the market and have a pristine business plan, more often than not, they man not have financial management amongst their skills.
Many a time new business owners don’t even have proper funding to back the many expenses that go into establishing a new business.
Entrepreneurs may face issues such as:
· What is the best way to ensure a positive working capital?
· How should accrued income be handled?
· Should they take out a short-term loan?
· Should they turn to traditional banks or alternative lenders for their loan needs?
· Where can SMEs go for online loans?
Fintech and their impact on business
Fintechs candidly is the revolutionary industry where terms such as AI are becoming yesterdays news. They are more than capable of providing new business owners with a set of tools that they would otherwise struggle to find. These could be as simple as payment automation and as complex as entire software packages to run the entrepreneurs business. They may also include fintech lending tools that will entrepreneurs will use to help them grow and expand.
The fintech industry is booming with its value in the past decade with the total value of Fintech investments worldwide at an all-time high of USD 33.9 Bn. This has led to more fintech firms focusing on new and better lending solutions for the ever expanding Fintech lending market. With better automation, speed, accuracy, and choice of lower interest rates for customers (both B2B and B2C) the alternative lending scenario has evolved in the past few years. As such, the industry is seeing a rapidly increasing number of small business lending platforms.
How exactly is Fintech helping small businesses manage their cash flow challenges?
In fintech, the goal is to facilitate the management of finances more efficiently. There is always excess funding available for investors/lenders (VCs/investors, P2P lenders, community lenders) to invest in order to earn higher returns than standard rates.
Meanwhile, there are others (such as small business owners) seeking lenders who will lend the required sums at competitive interest rates and with less hassle than traditional banks.
A solution to this problem was Peer-to-Peer lending (P2P). P2P provided a platform for wealthier individuals to channel their savings to areas which they may deem to be of the greatest need. Small businesses can fund their cash flow requirements in a jiffy with peer-to-peer lending, since there are no lengthy paperwork processes, quick disbursals, and easy repayment plans. In short, it is an extremely convenient way for them to finance their cash flow requirements.
The benefits of fintech lending are also emphasized by the fact that many of these loans are soft pulls, in contrast to traditional bank loans that are hard pulls. Small businesses do not have to worry about their loans affecting their credit ratings with soft pulls. Fintech provides lenders with faster, more effective, and more accurate background checks, which result in a quicker and more seamless loan origination process for borrowers.
The advantages of B2B lending are similar to those of P2P lending. Both methods eliminate intermediaries, which makes loan origination more efficient and cost-effective.
Factoring: The Fintech boon for small businesses
Businesses that fight the 90-day invoice payment window to stay afloat can benefit from invoice trading or factoring. That is because Invoices that are not paid on time can drastically affect their working capital and in the long term bring the business to a standstill.
Businesses can sell their overdue receivables to fintech lenders through invoice factoring for a small fee. By forgoing a percentage of the accrued results, they receive the profits in their entirety at the right time. Companies lend money to small businesses and assume the risk of accrued receivables in return for a fee. The companies will then process the invoices from the customers.
Crowdfunding is yet another popular method of fintech lending. A crowdsourcing platform's main benefit is that in addition to offering entrepreneurs early-stage funding, they help them establish relationships with a community of potential customers, allowing them to beta-test their project proposal and establish a loyal following from the start..
As a possible alternative, equity-based crowdfunding may be beneficial when securing a startup loan for a SME. To achieve these goals, small businesses approach angel investors, individual investors, or venture capitalists, who provide them with funding in exchange for equity.
Small businesses can also benefit greatly from equity crowdsourcing beyond just financing. They also benefit from the knowledge and expertise of the dedicated teams of the investors (marketing, logistics, finance). Moreover, the investors, who have a vested interest in the company doing well, extend advice and support to the owners of small businesses to ensure they do well, and that the business grows and expands over time.
Generally speaking, fintech lending has progressed dramatically since its inception. Small and medium businesses, as well as startups, have been given the impetus they needed to create, innovate, expand, and grow. It is impossible to move forward without innovation, and fintech lending has helped the world move forward since it has evolved and innovated in its industry. A smooth and efficient cash flow will become the hallmark of fintech lending, which is poised to become the future of lending.