FinTech Poised to Capture Burgeoning Millennial Small Businesses
While the biggest banks continue to ignore credit demands from small businesses, FinTech companies are finding ways to help the nearly 28 million small businesses in America. Public-private partnerships are moving payment processing to the next level, and FinTech firms are utilizing new advances to connect better with the needs of small businesses.
Following the mortgage crisis of 2008, Congress reworked banking and financial regulations through the Dodd-Frank Act and ushered in an era of restricted lending practices to small businesses and nonprime borrowers. The Consumer Financial Protection Bureau, a federal watchdog created by Dodd-Frank to oversee many areas of consumer finance, was charged in the Act with tracking small business loans to women and minority companies, but the Bureau has yet to develop a system to facilitate the loan data-gathering. One poll recently showed that 42% of small business owners were unable to secure a loan or receive all the money requested, echoing a similar poll on household borrowing conducted in 2013 by the Federal Reserve. Another poll by the National Small Business Association pegged the failure of small businesses to secure all of the funding needed at 43%. More and more, small businesses, which historically were almost wholly-funded by banks, are relying on credit cards and other methods of funding outside traditional financial institutions. The void left by big banks in the small business loan market has created a massive opportunity for innovative lenders.
Small businesses operate at the core of America’s economy. Small businesses employ almost 60 million people and created 1.4 million jobs in 2014 alone. Native Americans and Alaska Natives operate almost 273,000 small businesses, helping drive economic development in rural areas where such businesses can account for nearly 100% of a county’s commerce. As access to capital continues to be a major barrier to entry and expansion for Native small businesses, identifying and promoting reliable sources of funding and payment processing will be crucial to the economic expansion of remote reservation communities.
Last month a public-private consortium of banks, payment providers, consumer groups, and government agencies, dubbed the Faster Payments Task Force, issued a report on technological advances that could aid banks and small businesses process payments quicker. Aside from the ability to access revenues and limit cash flow concerns, security is a chief concern in the rapidly-digitizing business world. Even global companies like Chipotle and Home Depot have felt repurcussions from data breaches. Groups like the Faster Payments Task Force are bringing more reliable and affordable technologies to light and in the hands of businesses.
A working paper sponsored by the Harvard Business School and written by the former Administrator of the U.S. Small Business Administration denoted a large gap in credit availability for small businesses seeking $250,000 or less. Small businesses searching for less than $250,000 account for approximately 70% of small business loan needs but are chronically underfunded, with 60% of small businesses attempting to secure loans of $100,000 or less. Online lenders have stepped up to fill the gap between small business credit needs and major bank offerings.
Native-owned small businesses continue to be plagued by unique challenges in the credit market, including “difficulty in securing collateral because of the trust status of tribal lands, lack of affordable financial products and services, lack of entrepreneurship training and support services, lack of equity investment in Native-owned enterprises, and inadequate telecommunications and transportation infrastructure.” Native banks available to better fund reservation businesses are few and far between, although some show a high dedication to helping Native small businesses succeed. With around one-third of the Native population below the age of 18 and soon to enter the workforce, embracing FinTech and the online loan marketplace should help tribal communities grow sustainable economies for generations to come.