A study conducted by peer-to-peer lending marketplace operator Funding Circle found that lending to small and medium-sized business (SMB) accounts for only 0.7% of the overall balance sheet of banks in the U.S. This figure is 2% in the UK and 0.6% in the Netherlands.
Funding Circle managing director Bernardo Martinez explained that SMB lending is less profitable than banks’ other business lines.
The banks’ lack of focus provides opportunities for fintechs. Funding Circle, for example, has raised more than $1.7 billion in funding and has more outstanding SMB loans compared to almost 98% of FDIC-insured banks. Its rival Kabbage has closed a $700 million asset-backed securitization deal.
The study found several reasons why many SMBs choose fintechs over banks. SMBs are provided less financing, often face more stringent approval standards and receive terms from banks that are worse than their larger competitors. These findings are supported by the Federal Reserve’s Senior Loan Officer Survey. In addition, 74% of SMBs said the bank approval process takes too long.
The situation makes it very easy for fintechs to woo small business owners who are in need of capital and who have been rejected by banks. According to Martinez, 73% of their new customers are taking out their first business loans. He also said that the small businesses’ need for external financing is as strong as ever following a healthy economic growth in 2018, and many of them are already turning to alternative sources of funding because they realized that banks cannot meet their needs.