In today’s commercial lending landscape online lenders continue to gain ground over traditional banks. Small and medium sized business owners are hungry for capital and would often rather pay a higher rate for a quick turnaround (as is typical of digital lenders) than a better interest rate but with a lengthy application process. Usually they are applying for a loan because they have an immediate cashflow issue and time, therefore, is critical.
For small business owners, picking a lender, is all about the length of time the process takes and the distraction it causes (as they could be getting on growing their business!).
A traditional business loan application starts when a small business owner fills out a form.
The form will be online these days, something small business owners prefer, but that’s just the beginning of the process. It is what comes after that creates the time sink.
In order for a bank to make a credit decision, they need information from the SMB in the form of multiple financial documents. This is usually prepared manually by the business owner gathering, scanning or copying and printing financial data and handing it to the bank via email or face to face. This information then has to be organized by the bank, keyed in by hand, made into reports, and then finally analyzed by the credit team. A immensely time consuming process when you consider loan profit values can also differ drastically depending on the size of the business and the loan requirement.
What happens when a business owner forgets something on the list, includes the wrong financial year in the documents, or needs to provide additional information due to an irregularity or discrepancy in the accounts? More time is wasted while they locate, copy, and deliver the new information to the bank.
This process takes time. It takes many days for the bank to analyze the documents provided and build up a risk file on the potential client before they can make an informed decision. By which point, many small business owners may have gone somewhere else for their requirements.
Online lenders, on the other hand, make decisions using fewer data points. Ideally those which are available immediately and digitally. They understand that time is money for the small business and that with quick decisioning and a slick, digital customer experience they can win business.
Let’s also not forget there is a whole segment of the SMB market that the banks see as too expensive to serve, and therefore ignore. Online lenders play a crucial role in helping those business owners get access to the working capital they need.
What, therefore, will the market look like in a few years time.
“As the digital revolution continues to enhance how we go about our daily lives, more appealing, convenient, and cheaper options are making traditional banking seem like an old relic from the past…” Alex Shvarts, Money, Inc.
Digital services supported with digital data
According to “Closing the Gap in Small Business Lending,” a report by PayNet and Raddon one way that traditional financial institutions, such as banks, can recapture this market (and keep current customers from switching) is using technology to automate data collection and analysis. “Our joint research finds that a key factor preventing community institutions from closing this gap is the loan process itself.” They need to adapt and adapt quickly.
In their report, “The State of Digital Lending,” the American Bankers Association said, “Banks will not be able to grow and meet their customers’ expectations if they continue to rely on traditional, manual processes and channels that could be automated. It’s time to redefine loan processes to be able to match the experience offered by non-bank lenders.” Because as we have seen in consumer lending, small business owners will vote with their feet. They will choose a bank or lender that gives them the best combo of price and experience.
Redefining business loans means creating faster and easier experiences for SMBs and banks, streamlining the entire process from end to end through the use of online technology. And as we have said, time is the critical factor here. A business owner will go somewhere else if they can’t get the facility they need within the timeframe that they need it and therefore the banks need to implement technology solutions to automate the heavy lifting.
So, what next?
Luckily the market is evolving rapidly. Digital lenders continue to grow their portfolios and offer a solution for business owners not serviced by the banks. The banks are waking up to the fact that if they do not act they will also continue to lose market share at an accelerated pace. Finding the balance between client experience and cost (for the business owner) and risk and profit (for the bank) though can be a tricky business for the unless they digitze and automate processes and implement technological solutions to ease their burden.
Validis is a part of the solution for an evolved lending marketplace. Both traditional banks and digital lenders can make considerable efficiency gains by accessing and interpreting business financials digitally. Our clients are experiencing an average increase of 80% or more in efficiency for loan origination, processing, and credit decisioning. Not to mention how we support a much more streamlined digital client journey by removing pain for small business owners wherever possible.
Using DataShare, SMBs quickly and securely upload their financials directly from the most popular accounting packages. The data is then standardized into beautiful, dynamically generated, interactive reports (visible through our online data portal or integrated with current systems using our API), available for the lender to view in order to inform quick and confident credit decisions.
We have seen many other industries and markets digitze their activities and watched them reap the rewards (think Amazon). Commercial lending might be lagging behind but it won’t be long before the market evolves to such an extent that lenders are either keeping pace or falling behind.