Fintech - what does it all mean?
I recently read an online article in the Sydney Morning Herald (31 August) titled “Bruce Billson endorses disruptive online SME lenders”.
The article was referring to the growth of alternative lenders who are usually on-line and are referred to as “Market-Disruptors”.
At the time, I shared the article on LinkedIn, making the observation that I support the increased competition from alternative lenders and welcome new and varied sources of SME finance.
Fintech companies are a fairly recent development in the Australia. They have been in the UK and US for a few years and some of the Australian companies are off-shoots of the UK or US parent.
By way of background, Fintech is actually a really broad category. The word is a combination of Financial and Technology. Any company that uses technology to improve or develop a Financial Market could be termed a Fintech Company (as an example, BitCoin is regarded as a Fintech company). The Fintech companies that I am referring to are Online SME Lenders.
Given these Online SME Lenders have only recently entered the market, I thought it would be a good idea to look at some of the Online SME Finance options.
How do they work?
Online SME Lenders generally raise money from investors and lenders that they then on-loan to businesses. This means that they raise equity from investors and also obtain credit lines from mainstream banks. They make their money from a mixture of fees and an interest margin.
A variation on this model is the Peer-to-Peer model, whereby the Fintech Lender ‘advertises’ loans on their website and investors can ‘bid’ to fund these loans. Individual investors can bid relatively low amounts and can be one of many lenders to an individual business.
Why are they different?
Fintech companies differentiate themselves from traditional banks in the following areas:
They use technology and computer algorithms to assess credit worthiness
Their application process is usually on-line
They promote fast approval (within hours) and funds are usually available to be drawn down quickly, due to their use of technology
They promote that they lend on an unsecured basis (i.e. no requirement for real estate security)
What are the features of Fintech loans?
Fintech companies generally offer relatively small loans targeted to the SME market. Often between $10,000 and $250,000.
The loans are typically offered for short-terms. In many cases, the term is limited to 6-months.
Repayments are often daily or weekly (termed micro-payments). This means that these loans are most suited to businesses that generate regular cash flow.
Interest rates are typically based on a monthly rate. Ranging between 1% per month, to 2% per month……and more (yes that’s between 12 & 24%+ per annum)
Some Fintech companies offer an ongoing line of credit that can be re-drawn
Whilst unsecured loans are available, ‘larger’ loans will often require some form of security (such as a company charge/ caveat etc)
Fintech Loans are typically provided to fill some form of short-term need. The loans start from a relatively low level, which means that they are suitable for situations where the banks might not normally assist because the amount is too low/ no security is available.
Loans of this size, or term can be really difficult to access for SME businesses so they fill a really important niche (hence the segment is growing).
I need a loan, should I go to a Fintech company, or a bank?
This is a good question and there is not one right answer. The answer depends on your circumstances and the funding need.
The thing to remember is that all borrowing entails risk. To put it simply lenders want their repayments on the due date. If the repayments are not made, the lender will come after you. We recommend that potential borrowers seek advice from someone that is suitably qualified to match the correct loan type and repayment structure to suit their circumstances.