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The COVID-19 pandemic has destroyed millions of businesses and changed others irrevocably. Lenders are one of the business branches affected and many of them are struggling just like those who are currently unable to receive loans. Many sources criticize financing providers for stopping loan originations or tightening lending standards. However, the current situation has also created an opportunity for fintech. Online lending solutions, in particular, have gotten a chance to shine. But they will require some assistance from official authorities to use it.
Online lenders appeared in large numbers after the 2008 economic crisis offering alternative financing to those rejected by banks. The demand for their services has been huge as traditional financing institutions took almost a decade to increase small business lending.
However, due to the nature of these businesses, the majority of their clients were the so-called “bank rejects”. This means that they were mostly high-risk clients with poor credit scores and no collateral. Therefore, online lenders have faced much higher risks from the beginning. Many experts said that it will take the next global economic crisis to show if these businesses are really sustainable.
That time has come now.
Online lenders used high interest rates and fees as well as a large volume of loans to stay afloat. Unlike traditional banks, these businesses have no “cushion” granted by deposits and no real government security. Therefore, without a constant influx of new loans and profit from regular payments they cannot support themselves.
The COVID-19 pandemic triggered a situation where the majority of these lenders lost their main income sources. High-risk customers are defaulting on their loans in large numbers. And while court persecution is possible for these lenders, it doesn’t do them any real good now.
Loan origination has also almost stopped. In fact, some lenders cut it completely because they have no money to give out new loans. They also must admit that the risks have increased exponentially for the already high-risk small business lending.
However, there are also online lenders that are preying on the current situation. Those that are dishonorable yet have the resources are now “making a killing” by offering loans with insanely high interest rates. Unfortunately, desperate people often fall for it and the amount of total consumer debt is growing extremely fast. The situation is getting so bad it can cause a financial crisis of its own soon.
It’s a fact that some online lenders are acting amoral and outright criminal using the coronavirus disaster to their benefit. However, one shouldn’t judge an entire industry by those examples. There are many fintech companies that are making a positive change. Some of them, like Elevate Funding, pick up the slack for the banks, which refuse to approve loans for small businesses. Others, like Kabbage, managed to get approval to distribute government relief funds through programs like the PPP.
All these financing platforms deliver micro-loans to those most vulnerable at this time. Through this they are helping small businesses stay afloat. As small business is the main driver of the economy, these lenders are providing capital to help local economies from collapsing.
That’s how relevant small business lending is. And as online fintech solutions are the only ones doing it now, their ability to keep at it must be preserved.
There are no forecasts for 2021 that can be trusted completely. The current crisis is unprecedented in its scope and impact. Therefore, it’s impossible to predict exactly how the world will react to it.
However, some things are already evident. One of them is that the importance of fintech in this changed world will keep growing.
More businesses are moving online now and this isn’t going to change even after the pandemic ends. Therefore, online financing platforms will have even more customers as brick-and-mortar bank branches become obsolete.
However, the question is whether these lenders will be able to make it through the current economic crisis.
This seems unlikely if they don’t get some kind of government baking, like Kabbage. Without such support, fintech solutions are liable to run out of money as their clients default on their loans.
Sadly, a mass default also seems inevitable because small business owners simply do not have the opportunity to restore their revenues. They need financing to have a chance to do that, yet they have nowhere to get it from.
In the meantime, some online lenders would be happy to provide the necessary financing. But they don’t have the funds to do so. Unless this circle is broken, it might lead to more problems for the global economy, as a whole. Government support can do it, but we have yet to see whether this will happen.
There is also some hope for online lenders that have large enough capitals to sustain through this crisis. But again, the question is whether they would be enough?
Sponsored: Elevate Funding
Image source: https://bit.ly/2Ky22sx