The future is fintech

Small and medium-sized business borrowers are increasingly looking to online technology specialists in the post-pandemic era. Michael Haley reports

Regardless of whether banks are pumping the brakes on lending to small and medium-sized enterprises, lending in the SME space has not slowed. In part, this is because the market has been embraced by financiers in the fintech space, which lend through innovative technology
platforms.

Fintech is now a vital catalyst of lending in the private debt industry and more SME borrowers are seeking it out. Slowly but surely, the lender to borrower relationship in the fintech SME lending space is growing.

Capital markets business Percent is integrating fintech and lending through its recently launched debt capital platform, Sync, which allows fintech lenders to raise flexible debt capital.

“Our newest feature is transformative in that it is the first time market pricing and performance data is available to any lender who is interested,” says Nelson Chu, founder and chief executive of Percent, in an interview with Private Debt Investor.

“As a lender, you’re now able to sign up and see how the market is valuing your portfolio based on your performance,” Chu adds. “This is the first of many steps we are taking to empower lenders and help them achieve debt capital markets objectives.”

Founded in 2018, New York-based Percent has driven more than $600 million of transactions in volume ranging from a deal of $50,000 to one of $144 million.

Percent utilises proprietary technologies, data and integration to host institutional-grade loan transactions for lenders and borrowers. The company’s belief is that investing should be “more transparent, more accessible and more liquid than ever before”, according to its website.

“We’ve innovated across every phase of the securitisation process, from the structuring to the syndication and even the surveillance of asset performance, to make it all as seamless as possible,” says Chu, of Percent’s platform. “We take a uniquely lender-centric approach in every product and feature we release and the enthusiastic response from the audience has been amazing to see.”

Interest growing

Other fintech players are catching on to serve as hosts for lending deals as well. Private credit marketplace, Finitive, is a data-driven platform providing institutional investors with access to transactions in a fast, accessible and effortless way. The fintech platform has seen first-hand interest in lending to SMEs.

“We’ve seen substantial interest come back from credit funds for SME financing, but the banks have been slow to come back to the space,” says Jon Barlow, founder and chief executive officer of Finitive.

SME lending used to be the least popular category for financing on Finitive’s platform, Barlow says, but since the pandemic, interest has risen in the past year as some banks have stepped away from this type of lending. Attention has centred on SME lenders, leading to increased venture capitalist backing in the past few years.

Globally, SME lending companies backed by venture capital have collected $2.5 billion through 99 deals this year, according to financial research firm PitchBook. This year’s numbers are a significant increase from 2020’s pandemic-affected year, which saw $1.2 billion raised. In 2019, SME lending companies backed by venture capital brought in $1.6 billion in 129 deals. The increase in funding for SME lenders from previous years is a direct result of banks’ reaction to the pandemic.

“Private credit has been filling a void the banks have left behind,” Barlow says. “Once the banks started to back off, credit funds and other non-bank lenders stepped in to fill the void. Even if they come back subtly into the sector, I believe many banks that were previously active in the SME space will not come back.

“There has been a big theme around using private debt to avoid dilution among tech founders, and to minimise dilution among shareholders,” he adds.

“The market lending to SMEs that are tech-oriented is incredibly robust right now. It is better now than pre-pandemic,” says Barlow, who believes “main street” business lending, such as to hair salons or bookstores, has not recovered as strongly since the pandemic as tech-fuelled businesses. “You’re not seeing as much improvement to the main street SMEs because banks are not participating in great numbers.”

While some banks may have slowed down SME lending since the pandemic, the demand for fintech lending has not slowed in the least. In The State Of Fintech Q3 2021 report published by financial research firm CB Insights, funding for digital lending globally shot up to $14.9 billion this year to date, in 411 deals.

These funding numbers have already surpassed the total for the previous two years, which saw $6.3 billion in 306 deals for 2020 and $8.6 billion in 392 deals in 2019, according to CB Insights.

Transparency is key

Transparency has been a crucial factor in the demand for SME lending in the fintech space, as many banks had something of a bad reputation in this area.

“There has been a broader conversation in small business lending around transparency,” says Armen Meyer, vice president of fintech lending platform, LendingClub, in an interview with PDI. “We believe that fintech and banks should provide the most transparency they can to small businesses about the cost of credit.”

LendingClub allows small businesses to borrow between $5,000 and $500,000 through a network of lenders in its partnership with the Accion Opportunity Fund. Its platform lets businesses apply online to select which loan offer with monthly payment they think is best, with the ability to review it with client advisers online.

“We think the future of small business lending is with fintech banks,” says Jay DesMarteau, chief commercial banking officer at LendingClub. “We combine the lowest-cost products and suite of services that banks can offer with the convenience and technical sophistication of fintech.”

Meyer believes the demand for fintech in the lending market grew further as a result of the pandemic, when it was truly needed. “I think that fintech lending has really grown into its own since the pandemic,” says Meyer of the state of the industry in the past year and a half.

“Like in all crises, the weaker models get tested and break in times of economic trouble,” Meyer says in relation to the 2008 financial crisis when he was chief of staff of New York’s bank regulator. “Often those tend to be the ones that are least transparent and least focused on the borrower.”

As borrowers have figured out, SME lending is now much more focused on them, as the market has grown. Fintech has helped evolve lending to SMEs and become vital in its growth.

With demand for easy-to-use, borrower-friendly lending platforms fuelled by the innovation of fintech, lending to SMEs should continue to thrive and grow into a robust market helping shape the future of private debt.