Fireworks On The Horizon For Post-PPP Alt-Lending

The sun is high, the temperature is rising, and with COVID restrictions being lifted around the U.S., Independence Day marks the first opportunity for many to embrace a gathering around the barbeque or a group trip to the beach.

It’s also a pivotal moment for many small businesses eager to bounce back from shutdowns, forced closures and lost revenues. But for the ice cream parlor in need of raw ingredients, or the fireworks vendor looking to restock inventory, preparing for Fourth of celebrations (and, hopefully, a boom in business throughout the summer) can be a burdensome expense.

With the Paycheck Protection Program (PPP) and other government aid initiatives ending, small businesses need to turn to new sources of capital. According to some industry players, the moment could be ripe for an alternative lending comeback.

“PPP has come to an end and is starting to wear off in terms of its impact,” explained Sam Graziano, CEO of Linear Financial Technologies, in a conversation with PYMNTS last month. “As confidence in the small business base comes back, you’re going to see a lot more investment, and therefore a need for capital in the space.”

While small businesses seek funding beyond traditional lenders, alt-lenders have a chance to regain momentum after a tumultuous few years. But the marketplace and FinTech financiers of a post-pandemic market won’t look the same as those of the previous decade. With small and medium-sized business (SMB) demands shifting, the alt-lending market has new expectations to meet.

The Highs And Lows Of Alternative Lending

Following the 2008 financial crisis and the subsequent pullback of small business lending from traditional banks, FinTechs stepped in to put a digital-first twist on finance. For the first time, many SMBs were able to apply for and secure a loan entirely online, thanks to the likes of BlueVine, Kabbage and LendingClub.

But it was a new frontier for FinTech — and inevitably, not everyone got it right.

High interest rates and fees began to generate complaints and dissatisfaction. Plus, a few scandals in the market tarnished the reputation of several players.

LendingClub shuttered its in-house small business lending operations in 2019, instead opting to focus solely on a partnership model to connect SMBs to funding. That same year, talk of a slump in venture capital funding for the industry echoed growing skepticism that the market would continue living up to the hype of the early 2010s.

Last year, American Express announced its arrangement to acquire Kabbage following a difficult time amid the pandemic, when the FinTech suddenly closed off small businesses to credit without notice. It was a stark reminder of the conflicting positions on alternative lenders’ roles amid the pandemic. While FinTechs became a vital tool to issue PPP funding to SMBs, small businesses’ economic hardships weighed heavily on the alt-lending community, too.

The challenges for some first-generation alternative small business lenders continue, as U.S. lawmakers opened a probe into Kabbage and BlueVine in May to investigate possible failings to combat fraud and adequately vet borrowers when issuing PPP funds.

New Expectations Arise

Despite its bumpy history, alternative small business lending isn’t disappearing anytime soon.

According to James Sagan, founder and CEO of newly launched asset-based small business lender Architect Capital, the industry’s newcomers have an opportunity to learn from the past mistakes and successes of those older FinTechs. Rather than modeling their reliance on cheap customer acquisition to grow, he told PYMNTS, new alt-lenders are instead focusing on strategic partnerships and a robust data strategy.

Today, simply offering a digital-first borrowing experience isn’t enough for alternative lenders to compete. FinTechs are deploying new strategies to put alt-lending back in the spotlight, leading to new market entrants and a revival in venture capital interest. Players like Architect Capital are taking a more targeted approach to the market, focusing on asset-based finance and using sophisticated analytics to underwrite loans.

“Underwriting and the ability to say ‘yes’ to small businesses when others say ‘no’ … is the reason that non-bank small business lending got started in the first place,” said Ben Johnston, chief operating officer of alternative lender Kapitus, on the importance of data in small business lending.

Other newcomers are taking an industry-specific approach — like Pollen VC, which targets mobile game and app developers. Whereas traditional lenders take a “mile wide and inch deep” approach to servicing small businesses, said Pollen VC CEO and Co-Founder Martin Macmillan, a FinTech with expertise in niche markets does just the opposite, and is able to service a smaller portion of the SMB community but with a deep knowledge of their needs.

Open banking and embedded finance have created even more opportunities for alternative FinTech lenders to develop more robust underwriting strategies, lower the cost of capital and reinvent the borrower experience.

This summer, with commerce picking up and government aid winding down, market conditions could once again open the doors to another alternative finance proliferation. This time, success will depend on FinTechs’ ability to learn from the industry’s past mistakes, and embrace today’s evolving needs of the small business borrower.

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