The immense difficulty that small businesses face in securing a loan is well documented. As many as 40% of small business loan applications are rejected (though some estimates put it as high as 80%). And nearly 77% of small business owners have never even applied for a loan, in part because they believe they won’t be approved. The majority of small business owners that don’t pursue a loan may use personal savings to cover repairs, replacements, or other emergency costs—a model that certainly isn’t sustainable if the business’s needs far outweigh the owner(s) personal assets, which is a frequent scenario.
Here’s the stumbling block impeding small business loan approval: for community banks and other lenders, the operational costs to underwrite loan requests under $250,000 are the same as they are for requests over $1 million. With this kind of operational model, it’s no wonder banks are not servicing the loan needs of many small businesses.
An equally large barrier is that the processes in place to vet small business loan applications often involves putting pen to paper and spending weeks of time manually assessing creditworthiness. Working with small business customers can seem like you’re losing money—leading many banks to focus only on the larger ones.
If you’re among the community banks and lenders that aren’t profiting from small businesses, just think about the small business manager on the other end. Here’s how your small business lending strategy affects prospective borrowers—and how to make it mutually beneficial.
What it’s like to be a small business
Small businesses are the backbone of America. They account for 99% of businesses in the country, and employ nearly 50% of workers in the country, according to the U.S. Small Business Administration. With the rise of the gig economy, small businesses are becoming even more prevalent.
That doesn’t mean being a small business is easy. Even the most profitable companies can struggle to fund an unexpected cost—like their HVAC system breaking or a sprung leak in the roof. Businesses, and especially small businesses, don’t always have an extra $25,000 on-hand to take care of costs that suddenly arise, nor do they have the time to immediately run over to a bank to apply for a loan to cover these one-off expenses.
Small business owners can wear many hats—from being a cashier to a janitor to a customer service representative. Sometimes, they’re the only employee on duty. So when they need to step out of their business to apply for a loan, it could involve closing the business, losing customers, and losing profits. The compounded losses of closing—whether for a week, a couple of days, or even just 2 hours—can be enormous. Of the reasons why small businesses close, the failure to secure capital is at the top of the list.
How to make small business lending mutually beneficial
Small business lending can be exceedingly profitable for community banks and lenders—with the right approach. New technology streamlines the process of origination, underwriting, and servicing these loans. In fact, digitizing your application not only helps you better serve these customers, it helps you serve more of them. Here’s how: a digital application process enables you to pinpoint the parameters that are most relevant for your small business customers and automate portions—or all—of your lending process.
Beyond that, a digital lending platform provides the 24/7 convenience small business owners need when they can’t leave their businesses. Across generations, owners prefer products and services that provide them with greater convenience and ease—extending into how they manage their company finances.
According to a 2018 survey by the American Bankers Association, only 26% of banks are leveraging a digital loan application for small businesses (and less than 1% are digital end-to-end). And if you don’t offer a convenient solution, one of your competitors will—and your small business customers will flock to them. Adopting a technology platform can give your institution a competitive advantage and help build your customer base—and that’s a win-win partnership.