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Session 14: New Financing Channels - Coggle Diagram
Session 14: New Financing Channels
Small Business Lending
Strengths
Easy for small businesses to access.
Limited paperwork required.
Less time needed to be spent submitting paperwork for a loan.
Offers flexible loan options for businesses. Most small businesses seek loans under $50,000. Banks would not lend this money, as the costs to the bank are higher than the return from the loan.
Credit loans can scale as your business grows, as the online systems link directly to your business accounts.
Better user experience for small business owners, can see all there business data in one place and in real-time.
Limitations
Market is still developing, no solid players in the market yet. Do not have the existing customer base of banks.
Online lenders can charge higher interest rates, as they take on higher risk borrowers than banks would.
Heavily automated process, based on algorithms, little human contact.
Potential
Compete directly with banks in small business loan market.
Traditional Banks
Strengths
Have existing customer bases that the online lenders do not.
Can compete with online bankers, but have limitation.
Can offer lower rates and higher loan amounts to businesses.
Online lenders have to devote significant resources to find their customers.
Have lots of data on their customers.
Regulatory burdens make it unviable for banks to offer loans to small businesses.
Evident in smaller and local banks.
High compliance costs and regulations means it is not worth banks time and effort to invest in small loans. Not enough return on investment.
Challenges for Regulators and Policymakers
Complexity of online lending market.
Lack of market maturity.
"How do you provide the appropriate level of oversight but not dampen the growth in creativity and innovation in a sector where there is a gap?"
Online lenders are disrupting small business lending market, innovations of technology and data make it difficult to gage amount of regulations needed.
Amount of transparency and oversight is difficult to measure.
New Channels of Finance:
Crowdfunding, microfinance and peer-to-peer lending.
The emerging financial alternatives, such as crowdfunding and peer-to-peer lending, propose little changes to ownership and governance of new ventures. Depending on the financing mechanism utilised, there is varying levels of influence on ownership and governance of new ventures.
In developing countries, there is a very high demand for alternative financing opportunities because entrepreneurs face more challenges in accessing finance than in developed countries. For instance, developing countries have limited access to banks, weak financial infrastructure and high collateral requirements. This makes options such as microfinancing, crowdfunding and peer-to-peer lending attractive to entrepreneurs.
In developed countries, the options for traditional financing exist but are often excluded to entrepreneurs who are in the early stage of their business. They will struggle to access them. This is due to banks avoiding risk but not investing too early, recessions and financial crisis' that have tightened regulations around credit lending, and other options becoming available with less red tape (digital platforms). Crowdfunding offers lower barriers to access, more flexible terms and access to a large pool of small-time investors.