GUEST NOTE: Businesses need capital to start their operations, and historically, loans have been one of the most common strategies for obtaining that capital. After filling out a few papers, entrepreneurs can get access to thousands or even millions of dollars for the assets they need, and in exchange, they have to repay the money with interest.
However, the business lending industry is constantly evolving – and business owners need to be prepared for some major (mostly positive) changes. These are some of the most important trends and changes to anticipate in the future.
High Level Interest Rates and Financial Developments
First, we should talk about interest rates and high-level financial developments in the economy. Since the 1990s, the Federal Reserve has consistently cut interest rates in response to perceived financial crises. With interest rates getting 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, near zero percent; in turn, consumers and business owners have been able to take advantage of some of the lowest loan interest rates they have ever seen. Mortgages, business loans and other types of lending have essentially bottomed out.
Partly because of this institutional decision-making, we now live in an era of record high inflation. The value of the currency has fallen because the money supply has been so loose – and the Federal Reserve is looking to take corrective action by raising interest rates.
Generally speaking, this is the right move, as rising interest rates will limit the money supply and prevent inflation from spiraling out of control. But in the short term, business owners and commercial lenders will face higher interest rates.
In fact, interest rates could be on track to rise steadily for months or even years.
Blockchain and decentralized finance (DeFi)
Most of us are familiar with blockchain because of cryptocurrency, but it has huge potential applications in the world of finance. In case you are unfamiliar with the mechanics of blockchain, it is a technology that allows individual and private users to form a cohesive network together. Within this network is a shared ledger that securely and reliably records transactions on the exchange. It is the foundation of cryptocurrency, allowing users to execute and validate currency-related transactions with each other.
Some of the biggest advantages of blockchain as a financial tool include its extreme reliability, security, privacy, and accessibility. Even better, the blockchain is fully decentralized; it does not depend on a central bank or any other major institution to continue to function. Nor is it subject to the whims of financial regulatory decisions. Once blockchain begins to be more adopted by commercial lenders, the whole business lending game could change for the better.
Data analysis and predictive intelligence tools
Traditionally, when a business owner needs a business loan, they recognize that need at the time and seek out a lender for financing. But thanks to the power of data analytics and predictive intelligence tools, lenders may soon have the ability to reach out to business owners proactively – sometimes before those business owners even know they are about to need a loan.
There are signs that business lending may face tougher regulations in the near future. For instance, 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 credit applications for women, minorities and small businesses” .
For businesses that have already gone through a full digital transformation, it shouldn’t be particularly difficult to send information to the Consumer Financial Protection Bureau (CFPB). But for banks and lenders still processing transactions on programs like Microsoft Excel, it will prove difficult.
Financial regulations are not necessarily a bad thing, especially if they lead to measurable positive changes. However, they can make it more difficult to obtain business loans and they can add unnecessary expenses that introduce higher interest rates and fees for the borrower.
Thanks to the connected power of the internet, business owners no longer have to depend on big banks to get the loans they need to fund their businesses. Instead, they can rely on the power of private lending, seeking individual or aggregate 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 loans will always be a necessity, but their form and function will likely continue to evolve. Keep an eye out for the latest developments in this industry to stay one step ahead.