These new types of funders use either data stored on customers’ phones (either feature or smartphones), or online forms to determine their creditworthiness. That makes it easier to determine prospective borrowers’ potential default rate, maximum loan size, and loan tenor. These capital providers can access customers that live far away from brick-and-mortar financial institutions. The borrowers can apply for a loan through a phone or online, and will be notified when their application is approved. The money is then disbursed directly into their mobile wallets or transferred into their bank account.
While some of these funders may be able to fund larger amounts, the majority focus on relatively small funding amounts at first, and increasing the maximum loan size as borrowers establish a more solid track record. This is because they do not want to risk too much capital on one borrower before being sure they will get their money back. As they work with more borrowers and get better data on borrowers, they will be able to fund larger amounts. In the meantime, however, they can be a convenient (but expensive) source of working capital during periods of tight cash flows.
When applying for funding from these lenders, be deliberate about how you fill in the forms they ask you to submit, as some funders will take into account how a person fills in the form when making the funding decision. Taking a long time and making spelling mistakes will negatively affect your application and ultimately increase the cost of the loan.