When it comes to impact investing, it’s hard to beat a small business loan. Dollars are lent out and put to work generating jobs and supporting economic growth — and then they’re repaid with interest as the business grows. But until recently, only one type of investor was able to make this kind of impact at scale: banks.
Not long ago, the first, last and only stop for a business owner seeking a loan would be their neighborhood bank. They would schedule a meeting with a loan officer, compile a folder of paperwork, put on their best suit and offer their firmest handshake. Even with that, they had a good chance of being denied. This was not necessarily because of their creditworthiness. Structural issues in the banking industry make it hard for banks to lend to small businesses profitably at scale. Unlike consumer credit, the small business credit segment is complex, diverse and nuanced, with a lack of standardized data for underwriting. It can be a resource-intensive effort, and few banks make it a priority.
Over the past decade, a crop of fintech companies has emerged to give small businesses a new option, and 32% of all U.S. small business applicants seeking credit looked to borrow from non-bank providers last year. They sought to expand, pursue new opportunities, buy assets and meet operating expenses, according to findings in the Fed’s annual small business credit report. I have spent the past two decades working at both banks and fintechs, which has allowed me to witness the transformation of business lending firsthand. Unlike banks, fintechs enable business owners to apply in minutes and receive funds in days, expanding access to financing that they need to succeed and grow.
In doing so, some of these fintechs opened access to small business credit as an asset class for individual investors. This investment holds potential for direct social impact on Main Street beyond the absolute returns it provides — making it worthy of consideration for those looking to add an alternative asset to their portfolios that can do good while it does well.
Some fintech small business lenders use a model known as platform lending, sometimes called marketplace lending or peer-to-peer lending. On one side are credit-seekers looking to borrow. On the other side are investors looking to earn returns. In between, the platforms find small businesses in need of funds and handle the assessment of loan applications and servicing of loans, all while balancing the supply and demand of capital.