Filling the Gap: How Technology Enables Access to Finance for Small- and Medium-Sized Enterprises

Abstract

Traditional financial services are rapidly being reformed by technology. Small- and medium-sized enterprises (SMEs) account for more than one-half of the world’s GDP and employ two-thirds of the global workforce, however a key barrier to growth faced by SMEs around the globe is access to financing. This is not a new issue, as the onerous information, administration, and collateral requirements associated with traditional loans have inhibited SMEs from seeking or securing financing. The 2008 financial crisis only exacerbated the problem, as many local retail banks (often the primary providers of SME financing) closed their doors and the appetite for taking on high-risk SME loans was quelled. Online business lending may be stepping in to fill this gap by resolving many of the barriers associated with traditional SME financing. This paper analyzes data from PayPal Inc., a company best known for its global online payment system, and from Kiva, a crowdsourcing platform. PayPal Working Capital launched in late 2013; it is a product that enables SMEs to apply for and obtain short-term credit. Our objective is to understand how technology is impacting SMEs’ ability to access financing. Our findings suggest the following: (i) online business loans have stepped in to fill the SME funding gap left in the wake of the 2008 financial crisis; (ii) young and minority-owned businesses with low and moderate income benefit particularly from online business loans; and (iii) online business loans can boost the growth of SMEs in under-served counties. Based on increased sales of businesses that have received PPWC loans, we estimate that programs like this have the potential to boost economic activity considerably.