On September 16, 2016 at the 46th Annual Congressional Black Caucus was a session entitled “The Wealth Gap-Innovative Small Business Loans from Fintech Industry.” In the session, several organizations overviewed how Fintech companies are transforming the landscape of small minority-owned businesses. Small businesses now have access to capital for businesses without sole consideration of personal finances, such as credit scores. Credit scores have historically been an impediment in structural lending discrimination from traditional funding institutions.
Fintech uses technology advances to create an avenue for entrepreneurs to have access to working capital. Companies typically define themselves as online small-business lending platforms. While Fintech companies are nonbank entities, they partner with banks to provide the loans. The novelties of these apps are in the ease in the application process. In addition to creating access to capital, these technology applications make the process simpler by eliminating extra paperwork found in the traditional loan process. Fintech companies came in after the 2008 financial crisis.
Darrell Esch, Vice President and General Manager of PayPal’s SMB Lending, spoke extensively about the company’s role in providing alternative lending to small business owners and how it fills an industry gap. Darrell noted that the separation of personal and business was very intentional on PayPal’s end. Working capital loans allows PayPal to take the financial risk from the bank. Access to affordable and fair capital is important to Fintech companies like PayPal. Currently, PayPal offers up to $80,000 in working capital loans to small businesses, with 20% of loans going to places where traditional banks have been shut down.
Lisa Brooks owns Heart and Soul, a personal chef company, located in Charlotte, North Carolina. According to Lisa, business has grown from grossing $60,000 to over $300,000 with 12 chefs. In addition, she is able to employ individuals just out of culinary school. While her success is amazing, Lisa’s story does not begin here. Ms. Brooks was an IT professional who was laid off. As a result of the financial climate and loss of property, Lisa filed bankruptcy. Cooking had always been a passion, so she enrolled in culinary school.
Shortly after, Ms. Brooks began Heart and Soul, using PayPal as a merchant processor. As business expanded, Lisa was able to take on more clients and employ more of her culinary school classmates. Because Lisa already had a relationship with PayPal, she used their loan process. Lisa noted the following about the application process: transparent and easy access.
Lisa was fortunate to use PayPal as a merchant processor. The company kept track of her business performance analytics. Those numbers, based on sales, is what PayPal uses, instead of credit report scores. A member of the audience inquired about Lisa applying for a traditional loan. Lisa responded that she had not considered applying for a traditional bank loan given her bankruptcy. In fact, she was very happy with using a loan from PayPal because they collect loan payment off of percentage of daily sales. We all know that small businesses have times of successful sales and times where seasons are slower. PayPal collects 10%, 15%, or 20% of daily sales for loan repayment, plus a fee. Loans are usually processed within the same day. Small business owners, like Lisa, are able to choose their percentage to repay the loan. If sales decrease during a certain time period, the owner does not have to worry about defaulting on a loan, because it is not a fixed rate.
Implications for Small Businesses
Small business owners have an advantage to using Fintech companies for capital. While not all Fintech companies have the same terms and conditions, they are providing an important resource to communities. Kabbage, another Fintech company, uses credit scores in conjunction with other analytics to qualify a small business owner for a loan. PayPal is adamant about separating personal from business and not using credit scores. Fintech companies have the following in common: providing quick turn around on a loan, easy online applications, and access to capital for small businesses.
Regulations for Fintech companies have potential to further impact small business owners, especially women and business owners of color. What does it look like for more companies to intentionally go in the direction of PayPal—separating business from personal? Would that allow more women who are providing things like art, beauty services, and event planning to access capital without the fear of beg denied a loan based on a FICO score or debt?
Historically, small businesses have had systemic challenges accessing capital for businesses, especially businesses owned by women and people of color. The Consumer Financial Protection Bureau introduced a 2016 agenda to collect data on sex, race, and ethnicity concerning lending practices to small businesses. Small business owners are often creative, brave, and resourceful. Resourcefulness and creativity are not always met with enthusiasm. Practices of traditional lending opportunities present formal and informal access barriers. In communities of color, individuals operate within the informal economy. The informal economy has its own set of lending practices, such as people borrowing money from other business owners or trading services or favors. When it comes to traditional lending institutions, banks, and credit unions, people are not aware of the application process or how to build relationships with loan officers. In addition, lending institutions do not see the myriad of transferable skills and may not believe that owners can sustain a business venture. Companies like PayPal provide a vital resource by recording sales with merchant processing software to measure performance of business. Could regulations from the Small Business Administration incentivize more Fintech companies to use business performance instead of credit history? Our communities certainly thrive with the presence of these businesses.