Opportunity for fintech lenders to provide much needed relief

Efma feature

03 April 2020

In the U.S., fintech lenders will be part of the effort to keep businesses afloat during the COVID-19 outbreak.

The United States has now become the epicenter of the global coronavirus outbreak with over 200,000 reported cases. With a majority of states ordering their citizens to stay at home, the country is now on the brink of an economic collapse. In response, the United States Congress passed a $2+ trillion bailout rescue bill last week intended to prop up the nation’s businesses and people. While the bill is a vast document that allocates money in a byzantine manner to all parts of the economy, its 800 pages contain a major opportunity for American fintech lenders.

The bill allocates ~$370 billion for lending to small businesses throughout the country. It creates a mechanism by which small business owners can easily apply for loans. Banks are then encouraged to lend directly and quickly with the loans backed by the Small Business Administration. After the banks lend the money to businesses, they will be reimbursed by the Treasury department, with fees being determined by the size of the loan. Businesses who receive loans will not have to repay portions that went to paying employees, mortgages, rent, or utilities. This means many of the loans will effectively be grants that keep businesses from having to shut their doors permanently.

Normally, the bulk of these loans would be executed by traditional banks. However, included in the bill is a provision that includes fintechs among approved lenders. Treasury Secretary Steve Mnuchin said, “Any FDIC bank, any credit union, any fintech lender will be authorized to make these loans to a small business subject to certain approvals.” This is a significant opportunity for American fintechs that have become critical partners of SMEs in recent years.

Fintech lenders such as Kabbage, Square, and Stripe have become major sources of financing for small businesses. These companies tout their efficiency as a key differentiator and they can put their core competency to work in getting this stimulus money out to businesses as quickly as possible. At this point, speed is critically important. Money needs to get in the hands of small business owners to allow them to stay alive. There are stories from all over the U.S. of business owners in dire need of cash just to keep their heads above water for the time being.

The scale of this challenge - the Financial Times noted that “According to the SBA, there are 30m businesses with fewer than 500 employees in the US, employing 60m people, almost half of the private workforce” – is vast. With millions of businesses operating on tight margins, the threat of permanent closure - and permanent damage to livelihoods - is very real. Many businesses are cash-strapped and will struggle to stay alive for longer than a few weeks without immediate relief. If fintech lenders are able to get money into the hands of businesses quicker than traditional lenders, they would provide a crucial service to the small and medium-sized businesses that make up a large portion of the country’s economy.

Crises have a way of ushering in a new reality. What may seem unusual today will be the norm of tomorrow. In terms of lending to small businesses in the United States, fintech lenders look set to establish a pivotal role in the new reality. Fintechs have always billed themselves as being nimbler and more responsive than, from their vantage point, lethargic traditional players. The economic crisis wrought by the COVID-19 outbreak represents an opportune time for Fintechs to demonstrate their disruptive and proactive capabilities. Businesses, and the country, need them.   

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Keywords : Covid-19 , Fintech , SME/Corporate , Credit

Geography : USA