Fintech Start-ups Keen to Lend to Small Business

Fintech start-ups backed with AI and big data are filling the gap of providing financial credit to small business and start-ups in the times of pandemic.


Stressed by mounting debts, weakened finances, low to zero sales, and inability to cope up with the unprecedented times of the pandemic has left small businesses on the brink of closures. The number of small businesses shutting themselves has gone to a staggering high, which according to a survey done by LocalCircles states that 59 percent of the start-ups and MSMEs are likely to scale down, shut down or sell themselves in 2021. Only 22 percent of start-ups and MSMEs can sustain themselves up to 3 months, 41 percent are out of funds or have only one month of funds left.

According to the Ministry of Corporate Affairs, between April 2020 and February 2021, more than 10,000 small businesses have voluntarily shut down. Unlike larger businesses, there is no concept of mergers and acquisition (M&A) for small businesses. It is either a sale of assets or investors infusing funds to help them stay afloat. The precarious condition of MSMEs is indeed a matter of concern, as it forms the backbone of India’s GDP by contributing a significant 30 percent and employing 120 million according to CII (Confederation of Indian Industry). In such grim scenarios, only financial assistance can prevent small businesses from a downfall. 

The Emergency Credit Line Guarantee Scheme (ECLGS), an initiative from the government to aid covid-hit MSMEs is less than 12 percent which means only 33 lakh MSMEs can gain benefits that form a meagre 5 percent out of the total pie of 6.34 crore MSMEs. Besides, the traditional banks are always known to be shy to lend MSMEs, for which poorly organised lending, improper regulatory processes, and bureaucratic design are to be blamed. Banks find it cumbersome to distribute a Rs 1000 crore loan into a hundred Rs 10 crore loan or thousand 1 crore loan. According to the Association of Chartered Certified Accountants, there are nearly 50.7 million enterprises that lack access to traditional lending challenges, which comprises about 80% of the total 63.4 million MSMEs in India. This pushes small businesses to seek financial help from informal financiers, friends, family and other such personal channels.

Why is Fintech Keen to Lend Small Businesses Now?

Access to affordable formal credit has always remained a hurdle for the MSMEs in India and the disruptions to businesses by covid-19 has strained the liquidity that has further worsened the problem.  Several fintech platforms with their innovative financial solutions are bridging this funding gap for MSMEs. They can do this due to two reasons, the first being the fintech platforms have lower customer acquisition costs unlike banks and other traditional lending institutions and can fulfill the credit needs of small businesses that require small value loans. 

Second, the fintech space with its technology leverage can develop alternate forms of credit risk analysis using tools such as Artificial intelligence and big data which helps to understand and measure credit risk effectively and quickly. The access to GST-linked data of potential small business borrowers helps fintech platforms to analyse the business and cash flow cycles. 

How Fintech is Helping to Aid Small Businesses to get Financial Assistance?

Here are some ways that how Fintech is offering a hassle free experience financial assistance to small businesses: 

  • Finding proper sources of investment

     Using intuitive tools and predictive algorithms fintech is helping small businesses find the proper sources of investment. Investors are at times unable to identify businesses that may need investment. 

  • AI-Enabled Virtual Financial Advisors:

     Through artificial intelligence, fintech players have created virtual financial advisors for small business owners that address their queries be it knowing about the full form of MSME or how to apply for MSME registration and loan application. 

  • Help in filing tax returns and financial planning:

     Fintech companies help small business owners to file their tax returns and help in financial planning that requires a tool whose algorithms help to create financial plans for them. 

  • Risk Assessment and evaluation:

     Risk analysis of small businesses is vital for the lender to provide loans. Several banks deploy fintech to create a risk profile of consumers basis which banks can provide loans. Fintech platforms by leveraging mathematical models and systems can provide an accurate risk profile of consumers in a short time.

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A survey done by LocalCircles states that 59 percent of the start-ups and MSMEs are likely to scale down, shut down or sell themselves in 2021.

What Lies Ahead for the Fintech Players in the Lending to MSMEs

In the coming years, with increased digitalisation in the lending space, several banks can partner with fintech players to offer customised, innovative finance products to SMEs and hence diversify their loan book. Banks and fintech can explore different models of lending to small businesses. The fintech platforms for banks can act as a source of lead generation that the traditional banks can leverage to co-lend loans to small businesses using a hybrid marketplace model. 

Shalmoli Sarkar
Shalmoli Sarkar
An MBA in marketing and a BTech in chemical engineering, Shalmoli writes on marketing strategies and business technology for new and aspiring entrepreneurs.

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