Small Businesses play an important role in the growth of the Industrial and Services Sectors in India. Small Businesses contribute significantly to employment generation, balanced development and export promotion which are essential for achieving growth of the Country.
In spite of Small Businesses playing an important role in the growth of economy/job creation, they still have difficulty securing proper financing from banks. Banks are reluctant to extend loans to the small businesses and look for proper documentation, financial history and collateral before sanctioning any loan.
There are more than 55 MN SMEs and small businesses in India. However, there is a wide gap in Financing requirement and loan extended to these Small Businesses. To address this gap, Fintech companies are emerging in India to provide easy finance options to these SMEs. These Fintech Companies are using technology to grant loans to SMEs and other small companies.
The benefit to Small Businesses:
Access to funding for small businesses
Fintech companies are considered as Alternative lenders and can provide SMEs/Small Businesses with funding when banks are unwilling or unable to do so. Lenders can also extend the availability of credit to higher-risk profiles by bringing them together with investors with a higher risk appetite.
The speed of Fund Availability for Small Businesses:
Application and funds are normally available with few hours to 7 days and do not involve a physical visit to the bank branch. Speed can make a significant difference for a small business for the purpose of efficient functioning.
Loans are more costly than the classic bank term loan as these loans are unsecured and Banks normally do not provide unsecured loans to businesses without proper credit rating and documentation. However, these loans come with easy repayment option and interest is charged only for the number of days it is used so that effective cost of funds is reduced. Overall charges are lesser than traditional lenders.
Credit Score/ Parameters to Grant financing to these Small Businesses
Historically the main parameter to judge assess creditworthiness has been the CIBIL score. However, Fintech companies have added various other parameters in driving a robust credit score that is acceptable to banks.
The various such parameters are:
- KYC of owners/partners
Aadhar based KYCs, help Fintech companies verify the applicant by only taking his thumb impression to authenticate the person’s KYC. These companies have automated systems to check PAN no., date of birth and Fathers Name and have eliminated the need for physical verification, thus reducing the risk for fake ID and address proof. These companies also check and authenticate the Gas Connection, Electricity connection and Landline phone nos of applicants.
- Bank Details/Fixed deposit
Fintech companies are using technology to extract and analyze the transactions in bank accounts. They go on to check the EMIs, Credit and debit transactions in bank accounts, bounced cheques in the bank statement, Average daily/monthly balances, details of fixed deposits, amount of fixed deposits. The Behavior in the account normally helps Fintech to assign an appropriate credit score to the account holder.
- Education/Property owned
Some weight is also assigned to the education, the owned property of the person etc so as to add to the creditworthiness of the person.
- CIBIL Score
CIBIL score is continued to be a major weight of the credit scores. Fintech companies extract information about Loans already running, repayment history, past defaults, credit card defaults, Bank account running.
- Other Parameters/Social Scores
Some companies to take into account the social behaviour of the person by going through facebook account, LinkedIn account, no of connections, type of connections, and social media activity of the person.
All the above parameters are assigned certain weight and which help these companies to build a credit score of the borrower, more the score the less chance of default and risk.
To sum up, There are a number of companies emerging in the Fintech space providing easy finance options to small businesses which will eventually help these small businesses to grow.