A full decade after the financial crisis, many small businesses are still crunched for credit, but where traditional banks have failed to meet entrepreneurs’ needs, a rising breed of fintech upstarts are starting to fill the void. The recent launch of Stripe Capital offers an encouraging preview of how this new breed of lenders can help fuel small business growth through a tech- and data-savvy approach.
Stripe’s move to start offering loans to its merchants represents a step in the right direction – but to truly succeed, lenders like Stripe will need to expand their lending to small businesses beyond their own merchants.
PayPal offers an illuminating case study: The platform originally offered financing only to its own merchants, but its LoanBuilder division now provides loans to all qualified small businesses. The division’s short-term loans of up to $500,000 are highly acclaimed by small business advocates, and the swift approval process means that businesses can quickly access capital upon completion of the application process.
Stripe and similar players are likely to find significant value in spreading their lending wings to businesses outside their merchant networks. There’s abundant evidence that businesses beyond Stripe’s base of e-commerce merchants have an appetite for such lending services.
Additionally, Stripe would be well advised to broaden the scope of data it utilizes to make lending decisions. At the moment, Stripe Capital will decide whether to fund businesses based on transaction data through the Stripe platform – but there are a wide range of other key indicators of a business’s fundability, including other outstanding debts, the business’s total negative bank balance days, its amount of non-sufficient fund alerts, and its credit score.
Given the advent of online neobanks and open banking APIs like Plaid, Stripe risks missing out on significant business if it fails to expand beyond its merchant pool and take a more comprehensive approach to data-driven lending.
To drive successful results for both themselves and their customers, lenders should consider working alongside third-party platforms – including business loan marketplaces – which can provide access to new networks of qualified small businesses. Stripe may also want to consider acquiring a lender to expand its data and underwriting capabilities, much as PayPal acquired Swift Financial.
It’s clear Stripe’s foray into lending is still in its nascent stages, but nevertheless presents a promising sign for the market. Limited or not, Stripe has undoubtedly joined the growing ranks of fintechs raising the financial industry standard – stepping in for their customers where traditional banks have been stepping away. By expanding its customer base and data capabilities, Stripe could serve as a much needed lifeline for countless businesses – while ensuring its own longevity in the space.
