Small businesses are considered to be the foundation of the economy. Unfortunately, however, securing financing can be an uphill battle for small business owners. Traditional finance institutions are often inclined towards larger organizations with excellent credit history, which leaves small businesses with no other option but to explore systems that are tricky and sometimes restrictive. As a result, there has always been a significant funding gap that suppresses the growth of this vital segment of business.
A noted fintech leader, Lechi Zhang, also a Forbes Finance Council member, has been leading the way in addressing the funding issues faced by small business owners. Through his work at the SME Finance Forum—a G20 initiative hosted by the World Bank Group—Zhang has helped create sustainable pathways for SME financing, contributing to an ecosystem where lenders in the network have deployed over $141 billion in SME loans annually.
Understanding Non-Bank Lending
More and more small businesses are now showing interest in non-bank lending as a flexible and accessible funding option. Unlike traditional lending institutions, these lenders evaluate the creditworthiness of a business based on alternative credit assessments such as transaction history and cash flow patterns.
“In a historically rigid system, non-bank lenders bring the much-needed agility,” Zhang says. “If a business operates in underserved demographics or has limited credit history, this alternative approach can be their lifeline.” Often operating online, non-bank lenders have a streamlined application process. Compared to traditional lending institutions, they make faster decisions by utilizing real-time data and sophisticated algorithms. This efficiency and speed can be extremely critical for businesses that require funds immediately to deal with unforeseen expenses or make the most of new growth opportunities.
Though there are many advantages of non-bank lending, there are areas of concern such as shorter repayment terms and higher interest rates. Moreover, Zhang believes that non-bank lending requires better standardization across lenders so that borrowers can navigate their options without any confusion. His expertise has been showcased at major industry events, including Hong Kong FinTech Week and Latin American PYME finance conferences organized by the Inter-American Development Bank.
Solving the Puzzle: Embedded Finance
Embedded finance is another transformative development in the ecosystem of small business finance. Its objective is to simplify the borrowers’ access to credit lines, loans, and payment processing by the integration of financial services into e-commerce tools, accounting software, or other platforms used by the businesses.
For example, a small online retailer can leverage embedded finance to obtain loan directly from its existing e-commerce platform. Most importantly, there is no need for providing extensive documentation or submitting lengthy application forms. These platforms offer tailor-made financing options after evaluating the sales history of the retailer. The burden of fixed payment schedules can also be reduced by automating and adjusting payments as per the retailer’s revenue.
“Embedded finance is an excellent financing option because it can be seamlessly integrated with the day-to-day operations of a business,” Zhang explains. His expertise in alternative finance has also been recognized through key industry awards, including serving as a judge for over 100 business cases in the Stevie and Globee Business Awards. “It is undoubtedly a gamechanger in terms of accessibility and efficiency.”
Though he strongly recommends embedded finance, Zhang, who writes about FinTech and Small Business Financing, believes that it requires further innovation to address hindrances caused by limited reach, over reliance on just one platform, and its nascent state of integration.
According to Zhang, all stakeholders must prioritize inclusivity, affordability, and transparency to drive meaningful progress in non-bank lending. He emphasizes policy reforms for building a more helpful regulatory environment. Educational campaigns are also critical to ensuring that small business owners can easily navigate the intricacies of the financial markets.
“There is no denying the fact that small business financing has progressed significantly, but the job is only half done,” Zhang concludes. “Fintech innovators, regulators, and small business owners must work hand in hand to ensure that these solutions reach their full potential.”
