The Rise of Fintech Lending to Small Businesses: Businesses' Perspectives on Borrowing

Abstract

Online lending through fintech firms is a rapidly expanding segment of the financial market that is receiving much attention from investors and increasing scrutiny from regulators. Research is only beginning to assess how fintech firms' entry is altering the choices and outcomes of small businesses that borrow from them. The Federal Reserve Small Business Credit Survey is a unique data source on the experiences of business owners with new and more traditional sources of credit. We find that the businesses using online lenders are not representative of small and medium-size enterprise in the US. Businesses borrowing online are younger, smaller, and less profitable. Through reaching borrowers less likely to be served by traditional lenders fintech lenders have substantially expanded the small business finance market. We apply treatment effects estimators to flexibly control for composition differences in the borrowers. After controlling for compositional differences between online and bank borrower, we find that loan application amounts are generally smaller with fintech lenders; businesses that receive fintech loans expect more revenue and employment growth than those receiving a bank loan; and businesses that borrow from banks are more satisfied than businesses that borrow online, which are still more satisfied than businesses who were denied credit. These results highlight issues that the financial industry and regulators should examine as fintech lending to small businesses continues to expand.

Role of Leadership in Adoption of Blockchain Technology in Small and Medium Enterprises in Saudi Arabia

“…In some countries, 50% of SME financing applications are rejected. Some studies have found that one of the main reasons for the failure of the traditional financial industry is the slow and rigid loan process ( Saito and Tsuruta, 2018 ; Barkley and Schweitzer, 2020 ).…”

Small businesses and FinTech: a systematic review and future directions

“…With the development of such internet-based finance methods, the number of small businesses receiving credit has increased. In the USA, financial innovations like online lending are helpful for small businesses as these FinTech have great innovation and growth potential, allowing them to provide more small business loans [ 10 ]. Marketplace lending significantly raises entrepreneurship by relaxing credit market frictions, especially in regions with lower access to traditional bank credit [ 36 ].…”

Credit Availability for Minority Business Owners in an Evolving Credit Environment

“…The small businesses that we include in this analysis are highly varied in ways that interact with their need for and access to credit. Table 2 shows some of the variables available in the SBCS from 2016 to 2020 that Barkley and Schweitzer (2021) showed to be relevant to the credit decision. These characteristics vary between racial and ethnic groups—differences that will underpin part of the credit outcomes—so it is critical to systematically evaluate their role and whether any disparities persist across race and ethnicity after accounting for them.…”

“…The comparisons to bank credit are informative, but an analysis of potential racial disparities is not feasible because Jagtiani and Lemieux only observed approved loans and did not examine a comparable set of borrower characteristics for bank customers or businesses that are denied credit. Barkley and Schweitzer (2021) used the 2016 to 2018 SBCS data to show that younger firms with fewer employees and less revenue are more likely to take a loan from an online lender. They applied treatment effects to show that fintech lenders reach a broader range of businesses than banks: 44% of fintech borrowers would have been unlikely to receive bank credit (race and ethnicity controls are used in their models but lending discrepancies by race or ethnicity are not directly examined).…”