How fintech is transforming financial management capabilities for small businesses
Few things have the potential to cause rapid, widespread change like technology — just ask traditional financial institutions.
The evolution of fintech-powered innovations has transformed the financial services industry in only a few years, changing how businesses large and small manage their finances, pay bills and borrow money.
The change has been a challenge for brick-and-mortar lenders, forcing them to adapt in order to keep up with upstart alternative lending companies.
This trend has been good for businesses, particularly smaller enterprises, making finance automation, data analysis and flexible financing options within reach. In other words, giving them more financial freedom. As a result, more small businesses now have tools to save money and become more competitive.
Perhaps the best example of the fintech-led change is in the lending business. No longer just the province of banks, online lending companies have used technology to speed up the loan application process and the way in which they evaluate a borrower’s creditworthiness.
By relying on a broader set of financial data, online lenders will often make financing available to small businesses with higher risk profiles than a traditional lender would. As a result, these alternative lenders have cut into the lending business of traditional financial institutions.
This competition, however, has ultimately made many brick-and-mortar lenders stronger. Increasingly, forward-thinking financial institutions are partnering with alternative lending companies and other fintech businesses, using them as a conduit for expanding their lending business, rather than go through the costly process of developing software on their own.
By teaming up with these fintech firms, financial institutions are improving their own internal underwriting and clearing some of the obstacles that they have faced when extending small business loans, including documentation, compliance, cost, and underwriting.
Integrated financial management
The use of cloud-based applications to link a company’s finances under a single platform is also transforming businesses, especially smaller firms. The technology can streamline various back-office functions, enabling firms to automate many tasks, including payments, customer invoicing and payroll processing.
By syncing up financial accounts, businesses can set up bills to be paid automatically, all while keeping an accurate tally of their expenses. No more wading through receipts in physical or electronic formats to try to sort out whether a bill was paid.
Meanwhile, applications that automatically track employees’ hours and generate the required payroll are saving businesses money by minimizing errors. The all-in-one approach gives businesses a real-time view of their finances, which is key in accurate cash flow management.
One byproduct of a cloud-based financial management system is that all of the transactions generate a data trail that can yield valuable insights that would have ordinarily not been accessible to smaller firms. Consider the data that results from the invoicing process. Businesses that use a platform that can automatically generate invoices to their customers can use that data to make a better assessment of their potential cash flow gaps well in advance.
The same technology can be leveraged to examine whether a project is on track to be profitable, or to identify which products or services the company should prioritize to maximize sales.
Some of the most innovative financial services applications revolve around the area of payments, whether it’s in the context of peer-to-peer money transfers, e-commerce, or from an employer to their employee. With so many Americans essentially living paycheck to paycheck, it’s no wonder that a growing crop of financial technology companies are offering ways for people to access their paychecks a day or two faster.
Some of the more recent fintech innovations are also giving small businesses more financial flexibility. One example: enabling businesses to use credit cards to make payments in situations where it wasn’t previously possible, such as when the recipient doesn’t have an existing merchant account.
Rather than using their cash, businesses can make payments over email, without the need to share sensitive credit card information, which minimizes the risk of identity fraud. Such a payment feature makes it possible for cash-strapped businesses to tap their credit to cover the cost of rent or any other expense without the need for the recipient to have the means of processing a credit card payment.
Contrast that with the traditional methods available to businesses: Writing a check, which often takes a couple of business days to clear, or a bank transfer, which takes time to set up.
While adopting new technology may feel uncomfortable, most of the business-facing fintech tools have adopted usability conventions from consumer-facing apps, so training is minimal. Post adoption, the gains are meaningful: automation pushes more and more administration to the background so business owners can focus on growth, work-life balance, or whatever they find most beneficial with newfound free time.