What Fintech Lenders Look for When Approving a Loan

The business finance landscape has been changing over time. Once upon a time, there was essentially a single path to a small business loan: Gather extensive paperwork, make an appointment with a bank loan officer, and wait weeks or even months for a decision. Today, the traditional process still exists, but it has become supplemented by a score of new financial institutions and financial services companies that leverage technology to provide a broader scope of lending solutions. While small and medium-sized businesses once found it very difficult to get capital, especially if they had limited credit history, today's fintech lenders have made capital more accessible than ever.

Fintech lenders can offer faster, more accessible, and often more flexible paths to capital. While traditional banks usually rely on a rigid set of eligibility criteria, fintech lenders use financial technology to rethink what “creditworthiness” means for businesses at different stages of their development. It's not all about your personal or business credit score and collateral anymore.

Here, we dive deeper into what modern lenders look for when you apply for a loan.

In this article:

• What fintech lending companies look for when approving applications for fintech business loans or fintech line of credit.
• How online loan lenders can support your business with more flexible lending solutions.
• How you can improve your loan approval chances when working with fintech lenders.

What Fintech Lenders Consider

Online lending has made capital more accessible for businesses previously underserved by traditional lenders, but that doesn't mean the underwriting and credit risk assessment processes have been thrown out entirely. Nonbank lenders still want to avoid delinquency and ensure that businesses are able to repay what they borrow. They may leverage different tools and factors when considering loan amounts and loan repayment terms.

These are some of the most important factors that fintech lenders may take into account.

Business Revenue and Cash Flow

More than anything else, fintech lenders and service providers want to see how your business is performing. While a traditional bank might hyper-focus on historical financial statements and asset valuation, a fintech lender is more concerned about your business's day-to-day finances and growth potential.

When you apply for small business lending, fintech lenders may use secure, API-based connections to analyze your business's bank account data to assess cash flow in and out of your business accounts. That way, they can see how things are right now and spot trends in your revenue to identify seasonal fluctuations and gauge how well your business can handle new debt. They still want to confirm you have a clear ability to repay the loan, but they're more concerned with your business's predictable incomes and cash flow rather than its assets.

Using these data sets, fintech lenders may be more willing to lend to a small company with a promising business model than a traditional bank would.

Credit History

Credit history is, of course, still a factor, just not as much of one as it is with traditional banks. Still, fintech lenders are making credit decisions, so they will take a look at both your personal credit score and your business credit history. Fintech lending companies take a different approach to credit, however.

Traditional banks often have strict, non-negotiable business and consumer credit thresholds. If your scores fall below that line, you're likely to get rejected. Fintech lenders and lending platforms tend to be more flexible, viewing your credit score as just one point in a big data analysis. They recognize that even though a business owner might have a low personal credit score due to past circumstances, that doesn't necessarily have an impact on a thriving business today. They'll look at the whole picture, using the credit score as a secondary indicator.

This flexibility opens up opportunities for many small businesses that have been shut out by conventional lending. Neither people nor companies are defined by their pasts.

Time in Operation

Traditional banks often require a business to be in operation for a minimum of two years before they will even consider an application. That can be a significant hurdle for startups and new businesses, which are typically in the greatest need of capital.

Fintech lenders may have a more lenient view of this requirement. Many lending platforms and financial services providers will consider businesses that have been operating for as little as six months. Most importantly, they want to see financial viability and a strong business plan that outlines plans for growth.

Industry and Business Type

Fintech lenders analyze your industry and the nature of your business more than traditional lenders. While seasonal businesses, restaurants, and businesses with significant cash transactions might be considered high risk, fintech lenders use artificial intelligence (AI) to analyze more industry-specific data to make more informed decisions. This might include analyzing your market share, the foot traffic of your brick-and-mortar real estate, and other important factors that show your business's viability.

The Benefits of Fintech Lenders for Borrowers

The rise of fintech lending isn't just an innovation; it's a major shift for borrowers. Thanks to these lenders' ability to leverage technology to go beyond traditional metrics, it provides additional paths to business financing.

Fintech lenders use sophisticated algorithms and machine learning models to process and analyze vast amounts of data that wouldn't be possible for human loan officers. These algorithms can identify complex patterns and correlations to paint a more comprehensive and realistic picture of your business's financial health. They'll weigh alternative data sources and metrics that can fill the gaps that might exist on your loan application.

For instance, fintech lending companies might analyze payment processor information like your volume and chargeback rates from your Square, Stripe, or PayPal accounts, or look at your accounting software data to get a more granular look at your accounts receivable, accounts payable, and profitability. An online business might be able to offer sales data from Shopify or Amazon accounts to provide a day-to-day breakdown of sales figures and customer order trends

All of these technological advantages can lead to the following benefits for small businesses:

• Higher approval chances: Businesses that have been generating revenue from the start, but have a thin credit file, may have a higher chance of approval from fintech lenders than traditional ones.
• Faster decisions: The automation and data-driven process means decisions can be made in hours or even minutes, not weeks. Fast funding makes a big difference for businesses facing a cash crunch or ready to take advantage of an opportunity.
• Simpler application process: Fintech lenders can offer more streamlined loan application processes with less paperwork than traditional banks. That can make the whole experience better for small business owners.

Final Thoughts

Fintech lenders take a more holistic view of businesses than traditional lenders. Whereas once upon a time, business lending was reserved for established businesses with a strong credit history, fintech lenders are lowering the barriers of entry for startups and small businesses. Ultimately, the biggest question is whether or not a business can repay its debt, and fintech lenders leverage technology to assess more data sources and gain a more comprehensive picture of a business to answer that question. Fintech lending is more than a trend; it's here to stay, and it is well worth a look for your business.

FAQs About Fintech Lenders

How fast can I get a decision on a loan application?

One of the biggest advantages of fintech lending over traditional loans is speed. Many fintech lenders can provide a preliminary decision quickly after you submit your application and securely link your bank accounts. The entire process, from application to funding, can often be completed depending on the lender and the complexity of your application.

Do I need a perfect credit score to get approved?

While your credit score is a factor, fintech lenders typically use it as just one piece of the approval process. You don't need a great credit score to get approved, but it can help. Fintech lending companies may put more weight on your business's current financial health, cash flow, and revenue trends. A business with strong, consistent revenue and a track record of growth may be approved even with a less-than-perfect personal or business credit score.

Is the application process secure?

Reputable fintech lenders always prioritize security. While you should always check a lender's reputation and learn about their security protocols, most reputable lenders will leverage bank-level encryption and secure APIs to connect to your financial accounts. That means they can view your financial data without ever storing your login credentials, making the process both secure and private.

Are fintech loans more expensive than traditional bank loans?

Interest rates vary depending on your business's creditworthiness and financial profile. That said, fintech lenders tend to have higher interest rates than those offered by traditional banks because they're more willing to work with riskier borrowers and offer more flexible terms and faster funding. Essentially, you may have to pay more for the ability to access capital you wouldn't otherwise be able to get.

Can I still get a loan if my business is very new?

It depends on the lender, but many fintech companies are explicitly designed to serve newer businesses. While traditional banks may require two or more years in business, some fintech lenders will consider applications from companies that have been operating for as little as six months. They will primarily look at your cash flow and revenue during that period to assess your business's viability rather than your overall history.

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