The Future of Startup Loans
Funding a startup is not easy considering that the previous economic recession created a shortage of funds available for startups. As such, entrepreneurs are constantly wondering how long this will go on and if there is any good news in the future.
Many entrepreneurs have opted to seek business funding from unconventional sources because most traditional banks have raised their lending standards. While some are successful in securing a loan, others are locked out. This makes it almost impossible for these businesses to take off.
In this article, you will learn about the future of startup loans and what to expect now that digital currencies are here.
The demand for business loans is steadily rising
Despite the situation that dominated the period immediately after the 2008 recession, the demand for realistic loans has improved. Lenders across finance institutions are recording increased applications for business loans.
However, traditional banks are not in the capacity to meet the demand like they had done prior to the recession. It’s unfortunate that most of the money meant for business loans is held by the same banks that were hit by the financial meltdown.
Strict regulatory hurdles meant to measure a client’s credit worthiness have led to an influx of smaller financial institutions in the loans market. While the smaller banks and unconventional lenders are dominating the business lending market, bigger banking institutions are becoming quite conservative when dealing with startup loans.
As a result, most businesses seeking finances are forging beneficial partnerships with local and regional financial institutions. These institutions are more aware of the prevailing economic conditions in the area and are not skeptical about risk sharing with business owners.
Information challenge
In the past, lenders faced significant challenges when underwriting small business loans. This is because most of the information that is essential for the lending decision is not only asymmetric but also asynchronous.
In reality, every startup has distinct and specific needs that can change from time to time and can be peculiarly different from other businesses in an industry. This makes it hard for lenders to successfully monitor them and ascertain whether they have the capacity to service the loan.
But the introduction of advanced technology in the finance industry has made the process simpler. FinTech companies are making it easy for small businesses to share information on a continuous basis. Among the information shared is:
- The most preferred funding priorities
- Current bank statements
- Updated tax records
- Necessary authorization for reviewing credit records
In addition, the interaction of businesses with online loan application platforms ensures that there is enough information shared. The data gathered is used to ensure that small businesses are getting the most appropriate loan and while also ensuring that lenders are aware of the risks involved.
The data is also combined and systematically collated with information existing on other financial platforms to help in providing the desired financial support.
Evolution is set to benefit small businesses
With the aggressive integration of technology in the finance sector, there are new entrants in the market on a continuous basis. For instance, services like the BizAnalyzer score are used to collate over 2000 variables that are drawn from the market in which the business operates.
Both the score and updated ratings on the multiple dimensions can be accessed on the platform. In addition, you also get the corresponding guidelines that can help you improve your current scores and get access to a loan with favorable rates.
This contrasts how traditional lenders have handled the lending process where the borrower was in complete darkness. This lack of transparency has been a source of both frustration and uncertainty.
With the adoption of transparency in the lending process, it’s now easier for businesses to share confidential information in order to gain better loan rates. The lenders are at a better position in assessing the underlying risks that come with working with certain businesses.
Innovation is only going to get better and will provide better more loan opportunities.
The red tape is decreasing
Business funding used to be limited to mainstream banks, but things are different now. Entrepreneurs can access loans from multiple sources like peer to peer lenders.
Peer to peer lending platforms make it easy for business owners to access funds without knowing the lenders personally. Normally multiple people contribute the required cash, and to benefit the loan, you need to contribute an agreed premium to the lending platform.
This means the process of getting a loan is now simpler and you don’t have to go through the hectic loan application process at the bank. In addition, levels of uncertainty decrease.
Alternatively, crowdfunding platforms are quickly becoming preferred funding options for startups that are likely to be rejected by traditional banks. Although you will be required to pay a specified fee before using the service, you aren’t expected to repay the money, which differs from traditional loans.
However, you should understand that these alternatives don’t guarantee business success since your crowdfunding may not give you all the ingredients needed for a prosperous business. Nevertheless, technology is ushering in a new dawn and opening up options that were out of reach to businesses.
Final words
Building successful startups is not an easy task considering the challenges that funding has plagued the industry with. However, things are getting better and more businesses can access loans more quickly thanks to technology.
In the future, business lending is set to become easier and highly personalized as more financial organizations adopt big data technology. This will also lead to better loans since lenders will have all the data needed to understand the specific needs of each business.
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