Co-founder of Edge, Award winning marketer
When a crisis hits, it’s best to have a fallback plan. Covid-19 took us all by surprise, and small businesses were hit the hardest. How can the new generation of small and medium-sized enterprise (SME) lenders help small businesses overcome a crisis of the magnitude of Covid-19?
In 2019, small businesses employed over 47% of the total U.S. workforce. Our economy is backed by small businesses. But most don’t have the resources to cushion this type of fall. They often work on a steady cash flow that is used for ongoing operation and wages.
When a small business owner wants to expand, hire, overstock or do anything that is out of the normal operation stream, they usually need to inquire about an external funding source. This is where the alternative SME financing/financial technology (fintech) industry usually comes in — providing working capital or merchant cash advances.
Before the pandemic, the SME finance/fintech industry was blooming. Thousands of lenders, including several big players, got themselves involved in the mix. And they all had one thing in mind: Get more new accounts, and fast.
One problem I observed, however, was that most of the lenders were not very tech savvy. Their process was slow, manual and unsophisticated. Many lacked transparency and a fully automated process that provided comfort and accessibility. The fintech industry must stop with the manual processing and flashy lead-capture websites.
No Fallback Plan
The pandemic created a situation that most small businesses are unequipped to handle. No customers means no revenue. What happens to all the loans business owners took? Loans that come from SME fintech lenders are not secured. Instead, they’re based on the business’s performance.
When businesses have no incoming revenue, the owners can’t pay back the weekly or daily payments. In a matter of weeks, lenders’ portfolios are at risk. Accounts may end up defaulting, or the lenders may spread out the balance for a much longer term — something that does not line up with the business model.
This situation can create chaos, and it’s a situation many businesses and lenders are finding themselves in. Based on the conversations I’ve had with professionals in the industry, while some lenders faced delinquency with their creditors, others tried to sell portions of their portfolios, and many are still struggling to keep their heads above the water.
A little glimpse of hope was the Paycheck Protection Program (PPP), which allowed private lenders to participate to earn commission on the government-backed loans, and without owning the debt on their balance sheet.
An Opportunity To Evolve The Industry
I believe a new opportunity can arise from this crisis. We now have the opportunity to do things better, change the way we operate and build a stronger foundation for what I see as one of the fastest-growing and important industries. The possibilities are endless.
This is what drove me to form Edge. I had the vision to provide a better solution to small businesses that not only gives access to capital, but also focuses on human capital and strives to create an ecosystem that protects small businesses. To do so, we’re developing a 360-degree solution that benefits businesses beyond the core product — a solution that celebrates entrepreneurship.
We are in the age of empowerment, support and community. It is time to put our money where our mouth is and find our new edge. For fintech solutions out there, think about creating a model that provides a superb customer experience, ease of use and a true online platform with little to no human interaction. Most importantly, rates should compete with large banks and credit companies.
Sounds surreal? I say not at all. Give it some time, and I believe it will become a reality.
The SME fintech industry cannot continue on its old path. The evidence is piling up. One example can be seen with Enova adding OnDeck, previously the industry leader, to its portfolio. The market has changed; the industry needs to change as well.
The examples of giants going on a shopping spree to grab a hold in the SME financing industry tells us that we need to change our focus. Put more weight on talent, new products and an easier way to get access to capital. Big brands have the customer — in this case, the business owner. It’s a shift we must all do to give more confidence in our products and, at the same time, provide a protective ecosystem that gives access to more than just capital. Our goal should be not only to fund new accounts, but also to protect the businesses we work with already — and, if we can, help them grow.
Like every industry after a crisis, we need to evolve. Being creative and developing new ways to get the results we need is the only way to do it. If we want to safeguard our investment in small businesses, we must change and understand, and we need to be more than a credit company. We are partners. The small business ecosystem is relying on us, not just the government, to help rebuild. And we intend to do so.
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