The Bank for International Settlements (BIS) and the Federal Reserve Bank of Philadelphia released research that analyzed proprietary loan-level data from Funding Circle, an online platform for small business loans, and other small business fintech data. The data showed that fintech small business lending (SBL) platforms employ alternative data to improve credit scoring and increase access to capital at a lower cost for borrowers who are less likely to receive credit from traditional banks.

The study found that, when compared to traditional banks, fintech SBL platforms lent more frequently in zip codes with higher unemployment rates and higher business bankruptcy filings. Funding Circle also utilizes internal credit scores also allowed Funding Circle to lend to many business owners that would not have had access to bank loans due to their FICO score, improving small business owners’ access to capital and offering greater financial inclusion.

During the pandemic, banks prioritized processing existing business customers’ PPP loan applications, leaving smaller businesses at risk of bankruptcy. Fintech SBL platforms allowed smaller banks to come together to originate a larger share of PPP loans, expediting loans to small businesses that did not have existing relationships with banks at the onset of the pandemic.

“Small businesses continue to face post-Covid challenges, economic uncertainty and inadequate access to credit,” Angus Sanders, chief revenue officer and VP of product at Funding Circle US, said. “The results of this study reinforce how critical fintech small business lending platforms are to the current and future health of our country’s small businesses. Funding Circle is proud to support and expand access to capital to small businesses across the country.”

Results from the study also found that internal credit scores used by fintech SBL platforms were able to predict future loan performance more accurately than the conventional method to credit scoring, leading to better loan performance.