AltFin’s Next Hurdle: The Small Business Relationship

A lack of access to funding may have opened the doors for alternative finance, but AltFin’s ability to quickly innovate and provide digital services — often faster than traditional banks could — means that online lending platforms have been able to compete and gain traction.

There are ways, however, that traditional financial institutions (FIs) still beat out alternative players, especially when it comes to the relationship between small business (SMB) owners and financial service providers. SMBs value the advisory services they can obtain from human bank representatives, with the Federal Reserve recently highlighting the importance of community banks’ ability to connect with their small business clients as a key benefit for the industry. Small businesses value physical bank branches, too, with separate research suggesting that branches put banks in a “stronger position” to service their customers.

However, as an industry built online with the promise of convenience in self-service, alternative lenders may find it a challenge to establish one-on-one connections with their SMB customers — even as they’re able to offer the digitization that entrepreneurs often lack from their traditional lenders.

Andrew Mallinger, chief operating officer at merchant cash advance firm PIRS Capital, says that the industry is beginning to open its eyes to the importance of acting as an advisor to small business customers. In part, this need stems from shifting attitudes among SMBs with regards to alternative lending options, like the merchant cash advance (MCA).

“People were [wary] of what this was, but in the last five years, customers are talking to us about using [financing] for expansion and growth, hiring, inventory — rather than, ‘I need $50,000 in my account by Friday or I’ll go out of business,'” Mallinger told PYMNTS in a recent interview. “It’s cool for us, because we have a better choice of who we get to work with in terms of customers. It’s a more sophisticated merchant, not one that’s in a panic or frenzy, but one that has an opportunity and might just need a bit more money to bump them over the edge.”

With more entrepreneurs viewing these loan products as an opportunity, rather than a last-ditch effort, these customers are also beginning to place the same expectations on alternative lenders as they do on traditional banks. That includes the establishment and development of a relationship to help the business grow.

According to Mallinger, fulfilling that demand is good for both sides. After all, a lender needs a borrower to succeed if that customer is going to repay the advance and return as a repeat customer. Alternative lending companies have to understand that there will be “ebbs and flows” in a borrower’s financials, he noted, and should see those moments of financial tribulations as an opportunity to help out.

“Not every month is the same for these small businesses, and the closer relationship we have with them, the more they trust us,” he said. “Maybe one month, a big customer doesn’t pay them on time, and they can’t make their payments to us. We can talk to them, advise them on what to do, maybe help them collect. This creates huge brand loyalty and trust.”

Trust is an increasingly critical component of alternative finance’s growth. In another report by the Federal Reserve, published earlier this year, researchers found that SMBs still overwhelmingly turn first to large and small banks for financing, but 24 percent of SMB loan applicants sought financing from an alternative lender — a 3 percent increase from 2016 figures.

When analysts zeroed-in on the merchant cash advance, they found that the product offers SMBs the second-highest approval rate (79 percent, just behind auto and equipment loan products). With businesses taking their chance of being funded into greater account than any other factor as an influence on where to apply for a loan, MCAs’ high approval rates are certainly attractive.

Still, MCAs remain a less popular loan product for small firms, with only 7 percent of borrowers seeking an MCA last year, the Fed found. According to Mallinger, the alternative finance industry as a whole is still finding its footing amid market consolidation and growing pains experienced by some other names in the market.

“Right now, the industry is still finding its identity,” he said. “There are a lot of people popping up and disappearing.”

It’s one reason why the growing FinServ trend of data sharing — which, Mallinger said, would be incredibly useful for the MCA industry — hasn’t yet made its way to this space. Technologies that are gaining traction in the MCA space include artificial intelligence (AI), deep learning and machine learning (ML), all of which PIRS Capital uses in its underwriting process.

These automation tools are critical to empowering analysts and underwriters with speedy, accurate information to make more informed decisions, explained Mallinger. Indeed, what is perhaps alternative finance’s biggest edge over traditional competitors, and banks’ biggest draw to collaborate or acquire alternative players, is their agility in technology adoption.

However, Mallinger said, cutting edge technologies cannot entirely make up for the importance of the FinTech-SMB relationship.

“Automation is complemented by a very smart underwriter that can review work and look deeper into certain things that a machine might catch,” he said. “You still want the human touch of customer service, and to be in touch with merchants often and early, so that they know we’re there for them. I don’t think a machine or automation platform will ever replace that specific piece of the business.”