This guest article is written by James Sinclair from Trade Finance Global.
It’s no secret that the banks are reducing their loan book sizes and reducing their lending portfolios and exposure to small businesses – it’s been an ongoing trend since the 2008 credit crisis. However, it’s not all doom and gloom – advances in fintech and the rise of agile lending players has opened up a suite of innovation in the alternative finance space.
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Here are some of the recent developments which have started to see at Trade Finance Global, which are beginning to pave the way for innovations in debt and equity funding.
The Automation of Funding Applications
Nowadays, ‘humans’ have less influence in the approval of personal finance (e.g. applying for car finance online can be done automatically) and the credit checking of business applications is certainly moving in that direction. The industry has seen plenty of integrations to credit check and pre-qualify businesses for funding automatically, thereby reducing the 6-8 week debt funding application process to as little as a few hours.
Big Data and the Power of the Crowd
Big data is a major driver of the online lending space. Be that psychometric and behavioural evaluations, or cross-referencing social media activity, big data can help funders correlate these results with the borrower’s likelihood of defaulting / financial behaviour.
Now couldn’t be a better time for the rise of alternative crowdfunding platforms. With banks under regulator pressure to reduce their loan book exposure from 40:1 right down to 10:1, there has been little innovation and reduced lending from banks but it’s given rise to smaller niche funders.
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Crowdfunding is the pooling of finance from a group of investors (or the public) to invest in a company. A sound example of this is Crowdcube, an equity crowdfunding platform making it easy for people to invest online. The company raised £6m in July last year.
Crowdfunding was a relatively unheard of term 3 years ago, now it’s on the radar of most VC funds. Growing technology companies with customer-facing or retail products have seen significant increases in crowdfunded equity investment in the last few years. We’d see this, married with the wealth of big data continuing to change the alternative finance scene.
A shift from offline to online
Not that long ago, obtaining business funding would be done ordinarily through a local bank branch or a corporate financier / broker. This is still often the perception, although in reality, lenders are becoming increasingly visible online, and with the wealth of information they provide on how to use debt finance to improve for cash flow and grow faster, online referrers are now a tangible source of new business for lenders.
However, given the immense competition of online, being seen is crucial. Tim Berners-Lee, the inventor of the World Wide Web confirmed that the internet had exceeded 1 billion sites in September 2014, so resource and focus on online has been a priority for some lenders, to compliment and amplify the work of offline referrers.
Blockchain really could transform lending
Elements of the global supply chain are being disrupted by using blockchain technology. Supply chain and structured trade finance is the financing of goods which allows the business to extend payment terms to suppliers while also allowing SMEs to get paid early to prevent cashflow problems.
Blockchain technology is particularly interesting in the escrow space to help buyers of goods and sellers interact without a middle man (which comes with charges and fees). One application of this, is by using QR codes and a blockchain API to allow businesses to track goods securely, even as they transfer ownership throughout the journey.
As an example, we could start to see the financing of goods between a buyer and seller which validated through blockchain technology, meaning banks wouldn’t need to get involved, and the entire transaction is tracked from production to arrival at the buyer’s warehouse!
To conclude, alternative finance as a sector is transforming the way business can access capital, be that debt or equity. It’s forced competition in the marketplace which is generally speaking, good news for business and growth.