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Access to capital is critical to the success of small businesses. However, obtaining conventional credit can be particularly difficult for many small firms.  Lending requirements are much tighter now than they were before the financial crisis, and small businesses, especially start-ups, are still considered a risky bet by many lenders. 

Lending outside of the traditional consumer banking system—better known as Fintech—has become increasingly popular for small businesses. Because web-based technologies help reduce costs and interest rates, online business loans have become an attractive alternative. In fact, the online lending industry has made more than $5 billion in loans to small firms in 2015 alone. That number is expected to surge as more small employers turn to technology.

Fintech offers a number of benefits to both small businesses and investors. For small business borrowers, the biggest advantage is being able to access capital after being denied by traditional lenders.  Fintech platforms also provide loans that are too small to be profitable for most banks, such as those under $35,000.

Although Fintech provides significant advantages, there are some drawbacks.  Fintech lending platforms reserve the right to reject small business applications, just like traditional banks.  In 2014, The Federal Reserve found only 8 percent of business loan applications are accepted by the largest platform.

For the Fintech market to thrive, we must ensure that proper protections are in place for responsible lending— namely that small business borrowers understand the products being offered. And, lenders must be transparent in presenting the terms and conditions of the loans, while considering the ability of a business to repay.

Today’s hearing will provide Members with an opportunity to learn about the online lending market and how it has helped increase access to capital for small businesses.  Today, many firms are turning to alternative lenders that operate on online lending platforms.  These services have made hundreds of millions of dollars available to small firms by offering a number of benefits over traditional sources, but do have some drawbacks.  

I look forward to hearing from our witnesses on ways to improve the marketplace and increase access to capital for the nation’s job creators and innovators.