For many years, creditworthiness has been a keystone in the lending process—and even more so in the aftermath of COVID-19. With the need for small business funding greater than ever, it poses the question: is it time to turn traditional parameters and criteria on their head?
It seems so. And, as with many evolutions in the financial services industry, it begins at the retail level and bubbles up into commercial. Case in point: as reported by The Wall Street Journal, many of the major banking players including JP Morgan Chase, US Bancorp, and Wells Fargo will soon be offering credit cards to individuals with no credit score. Credit approval will work by examining consumer account balances and overdraft histories to identify creditworthy applicants. Eventually, this new model could carry over into auto loans, mortgages, and other financial products as well.
This shift comes as disadvantaged consumers are feeling the impact of their limited access to funding. But rethinking the underwriting process need not only apply to consumers. This type of reframing can also help open up credit access to small business owners that need it.
For small business lending, the model looks like this: utilize new credit criteria that’s more reflective of small businesses, rather than traditional criteria that favors large corporations. For a hurdle that has plagued the small business lending industry for years, here’s why the new thinking poses a solution.
- It breaks down institutional barriers. For Black-owned firms, credit availability is the number one challenge, per the 2021 Federal Reserve Small Business Credit Survey. Minority-owned businesses (or those that may not match the typical financial mold) tend to have greater difficulty securing credit. Redefining creditworthiness and underwriting criteria could open up access to financing for business owners that are disproportionately impacted.
- It welcomes a greater pool of small business applicants. Traditional lending criteria doesn’t always fit small business needs—especially following a pandemic that left businesses with more debt and less cash flow than usual. (For instance: a business owner’s credit score may not tell the full picture.) The old way of doing things may have worked, but as the economy evolves, so do business needs. Instead of banks upholding rigid paperwork requirements and strict standards, they can utilize different definitions of creditworthiness to open up access for more small business owners.
- It helps community banks and lenders grow. If your institution is not lending to small businesses, you’re missing a huge audience with significant profit potential. Plus, small banks and lenders owe it to the businesses in their communities to offer aid and assistance when it’s needed, and especially around times of crisis. With greater revenue for you and increased growth for small businesses, it’s a win-win situation for all.
Is your bank or credit union ready to join the Wall Street revolution? Contact LendingFront to learn how to modernize your small business lending today.