FinTech Loan Options
The largest trend effecting every single industry in the world today is technology; the financial technology, or fintech, industry is the overwhelming proof of the revolutionizing aspects of technology in our world today. The financial technology industry is starting to completely shift the financial sector of our world, similar to the effects that the creation of the internet had on well, pretty much every single industry today. But what is this trendy new hashtag, FinTech? Financial technology is essentially any business that aims their innovative work towards financial services through the use of modern software and technology. Financial technology has actually been around much longer than many consumers realize – there has been a 65 year period of financial technology developments that have led to the current booming financial technology industry. The industry started to play a real role in the finance industry after the creation of credit cards in the 1950’s, and since then, the evolution of the financial technology industry has exploded.
Even though financial technology has played a role in society for a long time, the 2008 Global Financial Crisis is largely credited for the overwhelming expansion and innovation of this industry. After the financial crisis, many American’s were furious at the banking system, leading to distrust for banks everywhere – this was only made worse by the fact that after the recession, banks stopped lending. Businesses, entrepreneurs, and innovators alike were exploring lending alternatives like never before. Now that the economy is finally rebounding, consumers are still wary of incumbent financial institutions, and thanks to the desperate need to explore technological alternatives years ago, there is much more trust in the financial technology industry as reliable funding sources, among other services.
According to U.S. FinTech Practice Co-Leads, there are four major areas of that encompass the basics of the Financial Technology industry ecosystem – otherwise referred to as the A, B, C, & D’s.
- A’s – These are the large, well established financial institutions (i.e. big banks or “incumbents”).
- B’s – The B’s are the big tech companies that are active in the financial technology industry, but are also involved in other major industries (i.e. Apple and Google).
- C’s – These are the companies that provide infrastructure or technology to improve financial service transactions (i.e. MasterCard).
- D’s – The D’s are the most recognized area today of the financial technology industry – the disrupters. These are typically the startup companies that have revolutionize the niche area they focus on. Disrupters are defined as fast moving companies focused on a particular innovative technology or process.
Breakdown of FinTech Industry
It has been difficult for analysts to gauge the exact number of the amount of start-up and established financial technology companies in the industry today; this is predominately due to the fact that the financial technology industry is so incredibly innovative and diverse. The financial technology industry has so many different startups trying to make it in this competitive industry, and many of these new financial technology companies are still starting out, complicating the numbers even more. Some of the major sectors of the financial technology industry consist of:
- Lending – Many people are lacking trust in the incumbent financial institutions in our country today, which is a major reason for the evolution of online lending services. The financial technology industry has created a new way for businesses and consumers to obtain loans; this includes peer to peer lending, access to working capital, and trust-based social funding. Under the lending sector of financial technology, credit scoring and verification services are also included.
- Payments – This sector of the financial technology industry is endless with the variety of ways to make payments both online and offline. Businesses in every industry are gaining access to top of the line Point of Sale systems, API integrations, social and mobile payments, and so much more.
- Personal Finance – Once again, American’s are uneasy about putting all of their money into the bank, and many people today are demanding an alternative to even opening a bank account – another area that disrupters in the financial technology industry have taken advantage of. There are many new ways for consumers to manage all of their finances, including apps to track expenses, clear debt, save money, optimize credit card rewards, and much more.
- Retail Investment – The biggest area for growth that the financial technology industry has seen in relation to retail investment is through a variety of crowdfunding and crowd-sourced investment expertise. The incorporation of social networks also greatly influences this.
- Remittances – Many startup financial technology companies in this sector start out by setting up easy money transferring apps and websites, however this sector thrives by incorporating the ability to easily (and affordably) send money internationally. Say goodbye to paying outrageous fees and waiting in long bank lines to send money abroad.
- Equity Financing – This sector of the finance technology industry includes easy, secure, and quick ways for private companies to raise capital through crowdsourcing platforms and secondary markets.
- Institutional Investment – Not only is fintech revolutionizing the average consumer’s life, but it is also effecting long standing institutions. There are a variety of new, alternative ways for hedge fund managers and professional traders to manage their portfolios and increasing returns. Some of the most innovative financial technology companies in this sector create alternative investment platforms and algorithmic trading tools.
- Consumer Banking – This is changing the way consumers interact with banks and banking services; this is a major way that many of the financial institutions are gaining customer’s back. Even though the financial technology industry is now big bank’s largest competitor, it will only do them well to incorporate more of the financial technologies being developed.
- Banking Infrastructure – In addition to the consumer banking sector, the banking infrastructure area of financial technology is also looking to improve the banking system. These solutions include API integration with banks and big data solutions.
- Financial Research and Data – The current generation is all about having information the minute they want it, and incorporating information services that enable investors to make better decisions is only going to be a bigger demand for consumers everywhere.
With the rapidly growing financial technology industry and the innovative collaboration seen from many of these new startup companies, it is almost impossible to say this is all the financial technology sectors. Who knows what the future holds for this incredibly innovative and creative industry.
FinTech Industry Trends
- User Experience and Trust – Consumers are still reeling from the tragic effects of the 2008 recession; with this comes the major distrust of banks, leading to more reliance on financial technology services. However, if FinTech businesses do not put more focus on user experience and consumer demands for financial protection, there will be downfalls.
- Mobilize Everything – Millennials and Generation X’s are glued to their cell phones – if a FinTech company is not focusing on making sure every single aspect of their company can be accessed quickly and efficiently via a mobile phone, then consumers will take their financial needs elsewhere.
- Working with Incumbent Financial Services – FinTech companies have been called the end to big banks, but in reality, financial technology companies working with big banks to implement their services are the biggest trend today. These two sectors must start working together to gain more consumers and meet consumer demands.
- Focusing on Social Challenges – Many inspiring financial services have been developed across the world to combat major social challenges; the most notable social challenge is the lack of banking systems available to people in underdeveloped countries. The FinTech industry has developed many life altering services to allow these people to have access to online banking systems.
- Financial Inclusion – This has been a major societal challenge that has plagued many neighborhoods in America, especially those on the lower side of the economic spectrum. The lack of available banks with affordable fees to simply open a bank account has left many families turning to alternative financial technology sources – and the FinTech industry is seeing many positive results from focusing on this demographic.
Types of FinTech Loans
|Line of Credit
|1 – 3 years
Fintech SBA Loans
Most don’t associate SBA loans with financial technology but thanks to advancements, lenders are now able to qualify applicants for SBA loans in the matter of minutes, and fund SBA loans in 7-10 business days (as opposed to months with the normal SBA financing process). Thanks to innovation and a streamlined process setforth by the SBA, small business owners are now able to obtain bank-rate financing in a timeframe that is competitive with mid prime alternative lenders as well as institional investors. Fintech SBA loans come in multiple forms, including both term loans and lines of credit. Uses of SBA FinTech loans include working capital, payroll, purchasing real estate, consolidating debt, refinancing business loans, expansion, etc..
- Rates: 6-8%
- Terms: 3-10 years
Mid Prime FinTech Loans
The most common and prevelent form of small business FinTech alternative financing is mid prime lending. FinTech mid prime loans offer rates that are competitive with traditional bank loans and SBA loans, but without all the hassles associated with each. Rather than having to contact a bank, and provide extensive business and personal financial documention, online FinTech lenders are able to qualify applicants within minutes (if not instantaneously) and can fund within the matter of days. All of this can be done with minimal documentation (bank statements, tax returns, P&L, application) as opposed to the documentation required by banks.
- Rates: 9-25%
- Terms: 1-5 years
FinTech Cash Advance
FinTech cash advances aren’t loans but the sale of a company’s future revenue to a FinTech lender in exchange for upfront financing (at a discount to the funder). FinTech lenders analyze a company’s cash-flow (usually by looking at bank statements and/or credit card processing statements) for total deposits as well as frequency of deposits. Once the FinTech funding company has determined what the small business can handle as far as maximum repayment, they will then calculate how much funding the company can be approved for based on a repayment model between 4-21 months. After funding the small business, a FinTech cash advance lender will collect repayment each business day (or weekly) via ACH through the small business’s bank accounts, or by collecting a percentage of each day’s credit card processing transactions.
- Factor Rates: 1.16-1.50%
- Terms: 4 months – 2 years
FinTech Invoice Factoring
Fintech invoice financing is a way for a small business to obtain financing by leveraging their 30-90 day unpaid invoices. A factoring company will forward the small business a percentage of the invoice’s value (minus a fee) and then forward the final amount to the borrower once the invoice is repaid.
- Factor rate: 1-5%