Many small business owners will need additional capital at some point throughout their business lifecycle—whether it’s covering increased costs or fronting an emergency repair. But these small business applicants may lack brick and mortar collateral and multi-year GAAP financial statements to mitigate the risk. For community banks and lenders, it’s difficult to sift through piles of paperwork to determine which small businesses can pay back a loan. But in turn, lenders are leaving credit-worthy applicants on the sidelines.
The problem with traditional lending processes? Because it’s difficult for banks to vet small businesses, worthy owners may be rejected for funding they need and deserve. 20% of small businesses fail in their first year without enough capital to cover unplanned expenses. Although there are certainly businesses that are a risk for lenders, there are better ways to assess risk and determine creditworthiness on the spot. Here’s why small business lending technology is the key to making high-quality lending decisions and approving more of the businesses that are worthy of funding.
The gaps in manual lending processes
Small business lending is typically approached like large business lending. That’s like a realtor taking the same approach for selling a bungalow as a country estate—when in reality, they’re marketing to different audiences with different needs.
Say your business loan application requires brick-and-mortar collateral and two years’ worth of tax statements, but your applicant is a highly-successful independent contractor. Or you require a business plan and projections but the bustling mom-and-pop restaurant simply doesn’t have the management team to produce them. These businesses, though strong performers, won’t be able to fulfill the same application requirements as their large corporate counterparts.
To make matters worse, vetting all of these elements on paper can set loan origination officers back weeks. Gathering information from different sources, chasing down missing documents, and meeting with customers takes time and resources.
A new perspective for small business lending
It’s time to break down the barriers to small business lending. The first step to assess true creditworthiness is to look at figures that really represent a small business’s operations. For example, real-time cash flow and bank transactions is much more indicative of a small business’s success than last year’s tax returns.
The second step is to employ technology, much like what is used in the non-bank lending space to make bank-originated loans more convenient and accessible. Software that covers loan origination, underwriting, servicing, and collections can both save time and help you better assess creditworthiness.
Software technology also gives you an advantage by helping your bank establish clear parameters for small business applicants—and lets them apply entirely online. You can automate requests that fall within a certain dollar amount and automatically release funding to worthy applicants. By using a system that’s tailored to your small business customers, you’re opening up an opportunity for them to flourish—and for your bank to profitably expand its lending.