I spend a lot of time on the road, meeting with small-business owners throughout New York, New Jersey, Puerto Rico and the U.S. Virgin Islands. Early in November, I was in the U.S. Virgin Islands, where I participated in a small-business finance conference. Afterward, a restaurateur, the head of a firm that helps domestic violence survivors, and the owner of a consulting firm approached me. All three asked for assistance in overcoming the same major obstacle to growing their business: access to capital. Thousands of miles away in New York, at small-business events in Rochester, Binghamton and Syracuse, small-business owners express the very same concern.
Time and again, no matter where I go, the number-one problem that crops up is access to capital and the difficulty of obtaining loans from traditional lending sources like banks. Low cash flow and short credit histories are some of the factors that make it difficult for small businesses to get loans. In addition, bank lending to small businesses has been slow to recover post-Recession. Despite low interest rates that would otherwise make for a good borrowing economy, many banks are being increasingly selective and denying loans to small businesses. With small businesses the driving force behind improving our economy (they created nearly two-thirds of the net new jobs generated in 2014, according to the SBA Office of Advocacy), helping them should be our highest economic priority.
As I travel around hearing about barriers, best practices and big ideas, I consistently see financial technology (fintech) changing the traditional lending landscape. Fintech startups are changing the game as we know it by making financial services more efficient, and they are doing this by using software and technology to open the doors to the Internet economy. So when small-business owners express their concerns about traditional lending, my response is that the blossoming world of fintech is providing an alternative. Nowhere is this more apparent than in New York City, where I attended Fintech Innovation Lab demo day and was blown away by the unmatched energy and enthusiasm these companies brought to the table. Whether its investment management or cybersecurity, college tuition or philanthropy, New York City startups are bringing fintech to the financial capital of the world.
Other companies like PayPal or Kiva come straight out of Silicon Valley, and their innovative approaches are altering the status quo while challenging the traditional industries that are less reliant on technology. PayPal, for example, offers loans to small businesses that are not based on credit history, but on revenue. So, if a small business has already taken out a loan and is in debt but the business is running well and revenue is up, they will be eligible for that new loan. The monthly interest paid on these loans is based on revenue as well, so when revenues are up, the monthly payment will reflect that, but if revenue dips, a condition nearly all small businesses experience from time to time, the monthly payment will be lowered accordingly.
Some small businesses have used Kiva, one of the oldest players in this very young industry. Kiva crowdfunds loans by soliciting funds from a network of individuals who put up capital in increments as low as $25 each. When that loan is paid off, these small-scale financiers can use the repayments to fund more Kiva loans for other small businesses. And some businesses have used crowdfunding to raise funds without going into debt. Business owners in my region who are already paying back traditional loans and cant afford to go deeper into debt have raised funds online via donation-based crowdfunding sites like GoFundMe, KickStarter and Indiegogo. They have funded goals as diverse as financial education for girls, book projects, mobile boutiques, and even capital equipment like an expresso machines for a coffee shops.
While fintech may not necessarily reduce the debt burden itself, it is a financing breakthrough in that it lets small businesses obtain capital more readily than the traditional bank underwriting process allows for. When small businesses like these are able to obtain capital, they can hire more workers, obtain valuable capital equipment, expand and open up new establishments, or even start a new business. And if small-business owners around the country are made aware of the alternative opportunities that fintech provides, they can expand and grow their businesses successfully. Thats good news for them, and great news for the economy.
The U.S. Small Business Administrations Office of Advocacy has been compiling research about the emerging alternative finance industry, including the overall landscape and the innovative peer-to-peer lending model. More info is available at www.sba.gov/advocacy/issue-briefs.
Teri Coaxum is the regional advocate for New York, New Jersey, Puerto Rico and the U.S. Virgin Islands (Region 2) at the U.S. Small Business Administrations Office of Advocacy.