Small businesses play an important role in the growth of the economy, especially in developing countries like India. This sector is contributing significantly to the GDP and also creating numerous employment opportunities. Throughout their lifecycle, these businesses need access to financial resources for their survival and growth. However, access to credit has become a major hurdle for them. Despite their growth record, small businesses are still underserved by financial institutions. According to an IFC report, only one-fifth of the credit needs of small businesses were met by formal loans, of which 85% were unmet.
Due to being new to credit or having no credit history, which is required for a bank loan, many small businesses miss out on many opportunities. However, with the advent of fintech startups, this problem has started to be solved and underserved firms have been given a chance to get loans through digital lending.
Digital Lending: A Boon for Small Businesses
With the advent of technological advancement and digitization, many digital lending platforms have emerged in the country that cater to the credit needs of small businesses in terms of digital loans. This new-age lending process has some inherent advantages over traditional lending, such as faster approval for credit, use of alternative data for credit worthiness, and operational cost effectiveness, according to a NITI Aayog report titled “Connected Commerce: Creating a Roadmap for Digital”. Inclusive India.” As the government is keen to stimulate this industry, it has prompted FinTechs to rush to fill the gaps – especially in the area of digital lending. Due to the many benefits they offer, digital lending is becoming a boon for small businesses.
The need for inclusive growth and the availability of opportunities for participation and contribution from businesses of all sizes and types is one of the most important requirements for the continued growth of the Indian economy. Digital lenders have significantly improved small business inclusion and formal lending by making information widely available, transparent and hassle-free.
To secure loan sizes and grow use cases, they are using data-backed underwriting tools and cash flow-based valuations. Small businesses are choosing these online platforms for credit over traditional lending institutions due to features like flexible tenure, minimum document requirements, low interest rates, simple KYC, and loan disbursal in minutes. As a result, digital loans are becoming popular among creditworthy small businesses.
Easy access to credit
To provide easy access to credit to customers even across the country, digital lenders are bridging geographical boundaries with creative solutions and fast loan approvals. Business owners in small towns can now easily access credit that was previously only available to them in physical locations far away. Additionally, various algorithms are being used by digital lending companies to improve and address repayment, late, and delinquent data, making it stronger with each repayment.
The use of technology not only eliminates bias and last mile fraud in loan approval but also significantly reduces the time and cost of loan evaluation, improving the economics of the entity.
With the elimination of human biases and limitations, modern digital models can use borrower data to calculate credit scores, underwrite loans, disburse funds, and collect payments. This increases credit flow to underserved businesses.
Fast loan disbursal
Leading digital lenders determine creditworthiness using information on a company’s performance and financial health. In the past, lenders evaluated loan applications based on various financial data and documents. However, today, digital lenders can quickly find out the type of loan and interest rate that the borrower is eligible for thanks to the widespread availability of data.
When underwriting loans for business owners without a formal credit history, a description of the company’s cash flow and transaction and behavioral baseline data replaces standard financial information. Advanced technologies such as artificial intelligence (AI) and machine learning (ML) algorithms are used to analyze alternative data, sales history and other information when calculating a credit score. As a result, automation reduces the cycle time of digital data management, and advanced analytics help digital lenders process loan applications faster.
Credit on the way to empowering small businesses
In India, banks have traditionally dominated the formal credit sector. However, the entry of FinTech has created disruption and brought many new initiatives, product offerings, and innovations to the sector over the past few years. The emergence of digital lending companies in India contributed to the country’s 39.5 percent CAGR growth over a ten-year period. Experian estimated that the digital loan market in India will be worth USD 270 billion in 2022 and USD 350 billion in 2023.
Technology will remain at the forefront of digital lending as countless users are first-time business loan borrowers making it critical to continually innovate and deliver products that empower small businesses. India may be well on its way to addressing its small business credit deficit and increasing the contribution of small businesses to its economic growth as formal, low-cost credit sources for small businesses expand, enabled by technology and a scaled credit infrastructure.
The views expressed above are the author’s own.
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