Benefits of Digitizing your Small-Business Lending
Small businesses, worldwide, are struggling. An April 2021 update by the World Economic Forum (WEF)[1], stated that 34% of US SMEs haven’t re-opened since January 2020. A recent White House fact-sheet[2], categorizes the rest to be non-competitive. It observes that “Small & Independent businesses had lesser opportunities for market access & earning fair returns.”
In the event of lack of earnings and fair returns, these small businesses are in urgent need of funds to stay afloat. However, traditional banks are not the right place for them to apply for loans given their weak credit scores, lesser transactions on cash flow statements than the bank would like to see and financial statements that don’t provide larger banks with the kind of assurance they need when it comes to paying back loans. Also, the smaller sum of loans required by these small businesses are not profitable for traditional banks as they spend a lot more time and resources on underwriting on these loans as compared to a fintech powered business lender would.
Rise of digitization of small business lending
According to the Fed Small Business Credit Survey of 2019, merely 20% of applicant businesses got the requested amount of funding. In other words, 80% failed to procure the loan they needed. This number may have grown due to the pandemic. Part of the problem is due to the use of archaic qualification criteria. Non-bank lenders are well aware that the profit and loss statement doesn’t reflect the resilience of the business. Instead, data for its transactions & operations represent its capacity to adapt & operate through adverse conditions.
On the other hand, SMEs are becoming better aware of their possibilities of joining hands with fintech. Whether it is to manage their banking & payments, manage their finances, or receive financing to sustain and scale their businesses. When it comes to financing their business through fintech lenders, SMEs know that they will not be measured on the traditional qualification criteria nor will they have to wait for their loans to be processed and disbursed over the next few months. A recent EY report on Fintech adoption share insights into how open to SMEs have become when it comes to fintech adoption.
The market is ripe for small business lenders to make it big by capturing their niches using the smooth digital lending platforms.
The Need for Digitization of Loan Process
Global consultancy firm McKinsey opines that major banks have digitized their loan processes. As a result, the approval time for SME applications has been reduced from 3-5 weeks to 5 minutes, and cash availability time from 3 months to less than 24 hours. It further observes that digitization lowers the overall process cost by at least 40 percent, and improves the approval rate because lenders have more data to validate applications. Digitization can make you as efficient & consumer-friendly as these banks.
The loan process also becomes less complicated for borrowers. SMEs no longer have to wait for long hours. They can simply register with the lender, follow online prompts to upload information, & apply for loans. Also, policymakers have made it easier to qualify for exemptions and assistance in business upgrades pertaining to software, accounting, cloud computing, etc.
In the long run, digitization saves lenders money, gets them more business, & saves borrowers a lot of time. Also the seamless and easy integration with the right fintech product and partner can make the lending journey easier and put lenders on the fast track to success.
The Benefits of Digital Lending:
The pandemic has forced many SMEs to automate processes of inventory management, accounting, customer relations, etc. In many instances, businesses have introduced digital payment options to their customers. As a result, they have created a digital proof of transactional data, consumer experience, & sales performance. These business analytics can help you:
- Simplify the loan process to the benefit of the borrower.
- Reduce paperwork & turnaround time for the loan application.
- Customize loans & credit instruments that finance the specific needs of multiple borrowers.
- Save costs & improve the conversion of leads to actual business.
- Secure additional revenue through origination fees & higher interests from a satisfied borrower.
- Ensure a swift payback, while offering various types of loans without collateral. These include:
a) Small Business Administration (SBA loans)
b) Term loans
c) Financing of inventory, invoice, equipment, or purchase orders
d) Lines of Credit (LoC)
e) Merchant Cash Advances (MCA)
It is safe to say that digitization is a win-win for both lenders and borrowers.
How Digital Lending Platforms become Useful to Borrowers:
In her book, Fintech, Small Business & The American Dream, Karen Mills writes that digital lending doesn’t occur as an isolated incident. Instead, it happens after digital transformation in multiple areas of the business value chain. Could you, as a lender, become the “right decision of a borrower” instead of a bank? The following examples can help gather a better understanding.
Example 1 - A business had an order of 100 units from a customer with ample time to manage it at affordable costs. Suddenly, the customer revised the order for 120 units at a premium price, but the lack of time increases per unit costs & compels the business to seek a loan. While digitized banks take 24 hours to furnish a loan, a fintech lender could provide it in a matter of hours as an inventory loan, purchase order loan, Line of Credit or Merchant Cash Advance,
Example 2 - An Amazon seller has a low sale volume on it, but gets good business across multiple e-commerce sites. Such a seller may need a Line of Credit specific to Amazon but does not qualify for the LoC extended by credit cards or the partner banks. Again, a fintech lender could be the go-to lender for the seller, if they can service a digital loan based on the aggregate online sales.
Currently, many businesses are working in an uncertain environment that may require frequent unplanned loans. Lenders can power up their lending processes by adopting digital lending software that is:
- Helpful in onboarding SMEs with little or no digitization within the business
- Compatible & easy to install
- Efficient or affordable in terms of user fees & interest rates
- Flexible to borrower needs, especially in restructuring loans
- Adaptive to multiple banks, cryptocurrencies & payment gateways for Point-of-Sale (PoS) loans
While the above features make fintech lenders competitive, business is all about accommodating the customer. The right fintech partner can help lenders with a robust in-house infrastructure. As a result, fintech lenders have the choice to waive off overdraft fees, minimum balance requirements & foreign transactions. This makes them better equipped to acquire a new business or service a privileged client.
[1] http://www.weforum.org/agenda/2021/05/america-united-states-covid-small-businesses-economics/
[2] http://www.whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-on-promoting-competition-in-the-american-economy/
