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Friday, 12 August 2022 12:20

What does the future of business lending look like?

By Guest Writer
What does the future of business lending look like? John Schnobrich on Unsplash

GUEST OPINION: Businesses need capital to begin operations, and historically, loans have been one of the most common strategies for securing that capital. After filling out some paperwork, entrepreneurs can get access to thousands, up to millions of dollars for the assets they need, and in exchange, they must pay the money back with interest.

However, the business lending industry is constantly evolving – and business owners should be prepared for some major (mostly positive) changes. These are some of the most important trends and changes to anticipate in the future.

Interest Rates and High-Level Financial Developments

First, we should talk about interest rates and high-level financial developments in the economy. Since the 1990s, the Federal Reserve has been consistently reducing interest rates in response to perceived financial crises. With interest rates going lower and lower, new standards have been set for lending at the highest level. 

In the wake of the COVID-19 pandemic, Federal Reserve interest rates hit new lows, nearing zero percent; in turn, consumers and business owners got to enjoy some of the lowest interest rates on loans they've ever seen. Mortgages, business loans, and other types of loans essentially hit rock bottom.

Partially as a result of this institutional decision-making, we're now living in an era with record high inflation. The value of the currency has gone down because the money supply has been so loose – and the Federal Reserve is looking to take corrective action by raising interest rates.

Broadly speaking, this is the correct move, since rising interest rates will restrict the money supply and prevent inflation from getting out of control. But in the short term, business owners and business lenders are going to have higher interest rates to contend with. 

In fact, interest rates may be on the path to rise consistently for months, if not years to come.

The Blockchain and Decentralized Finance (DeFi)

Most of us are familiar with the blockchain because of cryptocurrency, but it has tremendous potential applications in the finance world. In case you aren't familiar with the mechanics of the blockchain, it’s a technology that allows for individual, private users to form a cohesive network together. Within this network is a shared ledger that securely and reliably records transactions on the exchange. This is the foundation of cryptocurrency, allowing users to execute and validate currency-related transactions with each other.

Some of the greatest advantages of the blockchain as a financial tool include its extreme reliability, its security, its privacy, and its accessibility. Better still, the blockchain is entirely decentralized; it's not dependent on a central bank or any other large institution to continue functioning. It's also not subject to the whims of financial regulatory decisions. Once blockchain starts seeing higher adoption among business lenders, the entire business lending game could change for the better.

Data Analytics and Predictive Intelligence Tools

Traditionally, when a business owner needs a business loan, they recognize that need in the moment and seek out a lender to procure funding. But thanks to the power of data analytics and predictive intelligence tools, lenders may soon have the option of reaching out to business owners proactively – sometimes before those business owners even know that they're about to need a loan.

Stricter Regulations

There are some signs that business lending could face stricter regulations in the near future. For example, section 1071 of the Dodd-Frank Act recently “amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile, maintain, and submit to the Bureau certain data on applications for credit for women-owned, minority-owned, and small businesses.” 

For businesses that have already made a full digital transformation, it shouldn’t be especially difficult to send information to the Consumer Financial Protection Bureau (CFPB). But for banks and lenders still processing transactions on programs like Microsoft Excel, this will prove challenging.

Financial regulations aren't necessarily a bad thing, especially if they result in measurably positive changes. However, they can make it more difficult to get involved in business lending and they can add superfluous expenses that introduce higher interest rates and fees for the borrower.

Private Lending

Thanks to the connective power of the internet, business owners no longer have to rely on major banks to get the loans they need to fund their enterprises. Instead, they can rely on the power of private lending, seeking individual or aggregated lenders to provide capital in exchange for a fixed interest rate. This opens the door to many new entrepreneurial possibilities – and helps business owners become less dependent on institutional banks.

Business lending will always be a necessity, but its form and function are likely to keep evolving. Keep an eye on the latest developments in this industry so you can stay ahead of the curve. 

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