How digital lending has become a game changer for small businesses

Small businesses play a vital role in the growth of economies, especially developing ones such as India. The segment has been significantly contributing to the GDP as well as creating myriad job opportunities. Across their lifecycle, these businesses require access to robust sources of finances for their survival and growth. However, access to the credit has been a major obstacle for them. Despite their growth record, small businesses have until now been underserved by financial institutions. According to a report by the IFC, only one-fifth of the credit needs of small businesses were met by formal credit, leaving 85% of them unfulfilled.

Owing to factors such as being new to credit or having no credit history, which is required for bank loans, several small businesses miss out on several opportunities. However, with the advent of FinTech startups, the issue has started to get addressed, and the firms that were underserved have been given a chance to obtain credit via digital lending.

Digital lending: a boon for small businesses

With the advent of technological advancements and digitalization, several digital lending platforms have emerged in the nation that cater to the credit needs of small businesses in terms of digital lending. This new-age lending process has some inherent advantages over traditional lending, such as faster approval to credit, use of alternative data for creditworthiness, and operating cost efficacy, according to a Niti Aayog report titled “Connected Commerce: Creating a Roadmap for a Digitally Inclusive Bharat.” With the government being eager to stimulate this industry, it prompted FinTechs to rush to fill the gaps—particularly in the area of digital lending. Owing to several advantages they deliver, digital lending is turning out to be a boon for small businesses.

Getting inclusiveness

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 development of the Indian economy. Digital lenders have significantly improved small business inclusion and formalised credit by making information more widely available, transparent, and hassle-free.

To sachetize the lending size and increase use cases, they are employing data-backed underwriting tools and cash flow-based assessments. Small businesses are choosing these online platforms for credit over traditional lending institutions because of features like flexible tenure, minimal documentation requirements, low interest rates, simple KYC, and loan disbursement within minutes. As a result, digital lending is getting popular among creditworthy small businesses.

Easier access to credit

In order to provide customers with easier access to credit, even in the country’s hinterlands, digital lenders are bridging geographical boundaries with creative solutions and quick loan sanctioning. Business owners in small cities can now easily access credit that was previously only available to them in distant physical locations. Additionally, a variety of algorithms are being used by digital lending companies to enhance and address repayment, delay, and delinquency data, making it more robust with each repayment collected.

Utilizing technology not only eliminates biases and last-mile fraud in loan approval but also significantly reduces the time and cost of credit appraisal, improving the unit economics.

With the elimination of human bias and limitations, modern digital models can use borrower data to compute credit scores, underwrite loans, disburse funding, and collect repayments. This increases the flow of credit to businesses that are underserved.

Faster loan disbursement

Leading digital lenders determine loan eligibility using information on a company’s performance and financial health. In the past, lenders evaluated loan applications based on a variety of financial data and documents. However, today, digital lenders can quickly ascertain the type of loan and interest rate the borrower qualifies for thanks to the widespread availability of data.

Details of a company’s cash flows and transactional and behavioural baseline data take the place of standard financial information when underwriting loans for business owners without a formal credit history. Cutting-edge technologies such as artificial intelligence (AI) and machine learning (ML) algorithms are used to analyse alternative data, sales histories, and other information while calculating credit scores. As a result, the automation reduces the cycle time of digital data management, and advanced analytics help digital lenders process loan applications more quickly.

Credit on its way to empower small businesses

In India, banks have traditionally dominated the formal credit sector. However, the entry of FinTech has caused disruption and brought about a lot of new initiatives, product offerings, and innovation in this sector over the last couple of years. The emergence of digital lending companies in India over a ten-year period contributed to the country’s growth of 39.5 percent CAGR. The value of the digital lending market in India was estimated by Experian to be USD 270 billion in 2022 and USD 350 billion in 2023.

Technology will continue to be at the forefront of digital lending as myriad users are first-time business loan borrowers with little to no credit history, making it crucial to constantly innovate and deliver products that empower small businesses. India can be well on its way to solving its small business credit deficit and enhancing the contributions of small businesses to its economic development as sources of formal, low-cost credit for small businesses increase, made possible by technology and scaled credit infrastructure.

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