SMB Lending Solutions
Saying 2020 has been a challenging year for small- and medium-sized businesses (SMBs) would be an understatement. Nationwide shutdowns and a reduction in consumer spending has impacted the livelihood of many business owners, causing them to seek out Small Business Administration (SBA) and Paycheck Protection Program loans in unprecedented numbers.
However, even before the COVID-19 pandemic, there was a steady increase in SBA loan volume. According to Forbes, during fiscal 2019, there were more than 63,000 approved business loans that together exceeded $28 billion.
But where are SMBs seeking out these loans? FinImpact reported that large financial institutions are responsible for the majority (48%) of small business loans, while small- and medium-sized banks follow closely behind, sourcing 47% of loans. Online lenders source 24%.
There is an opportunity for smaller banks to surpass larger banks in the business of SMB lending, but they need the right technology solutions. Let’s explore what Modellica Engage can do for banks and credit unions wanting to serve the SMB market.
SMB lending is stabilizing
Smaller banks and credit unions may be hesitant to upgrade or adapt their SMB lending process for a number of reasons. Firstly, as they already understand, catering to small businesses requires a different approach to the application process and risk management. In combination with this, the lending market has been uncertain lately due to the COVID-19 pandemic. In an effort to protect itself from additional debt during these times, many businesses have reduced their credit lines and turned to government aid for financial assistance.
However, this trend is finally starting to plateau. The American Bankers Association recently analyzed reports from the Federal Reserve and provided an optimistic outlook on the current status of commercial lending. The Banking Journal reported that in the third quarter of the year, fewer banks reported tightening their commercial and industrial (C&I) loans compared to the second quarter. This is helping business loans stabilize once more as financial institutions are willing to provide commercial loans even during uncertain economic conditions. Most banks that reported easing these restrictions did so because of “aggressive competition,” so it’s likely this trend will continue as more lenders reduce limitations.
While demand for C&I loans was slightly weaker than expected, in the current market no change is almost as good as a positive change. It’s clear that business lending is once again becoming more stable, and that means banks and credit unions have an opportunity to capitalize on the market where some competitors are still hesitant to offer loans again. With the right solution, they can continue to serve the SMB market while ensuring they aren’t taking on too much risk.
Smaller banks and credit unions that want to lend to businesses must be prepared to update their application process and improve their marketing strategy to reach these borrowers who are starting to seek out financing from these lenders once again.
How banks and credit unions can adapt
Though large banks remain the most popular distributor of small business loans, online lenders have been gaining market share. A report by the Board of Governors of the Federal Reserve System found that nonbank online lenders offering small-dollar credit products are an especially attractive option for businesses deemed high-risk.
Businesses are turning to these nontraditional online lenders because the application process is fast and simple, but are often sacrificing a quality customer experience. According to the same FRB report, only 33% of businesses are satisfied with their experience with online lenders, while that number is 73% at small banks and 55% at large banks. Furthermore, 63% of these borrowers reported challenges working with a non-bank online lender when it came to interest rates and repayment terms.
Small- and medium-sized banks and even credit unions already differentiate themselves from other lenders through superior customer experience, but they need new technology to compete with marketplace lenders (MPLs). A solution that can help banks and credit unions create a fast and accurate online lending experience for these borrowers is needed to become a powerhouse in the SMB lending landscape.
A trusted solution already exists
Local banks and credit unions already have loyal customers and experienced lenders, the missing piece of the puzzle is a tried and trusted technology solution that will help them serve SMBs.
Modellica Engage by GDS Link is the one solution that can help small banks and credit unions level the playing field with large financial institutions and digital native lenders. Seeing how MPLs create a seamless, end-to-end borrowing experience for businesses as well as consumers, Modellica Engage empowers smaller financial institutions to create a 100% online experience for their borrowers as well.
This solution provides a powerful pre-screen engine that enables banks and credit unions to give a meaningful offer to SMBs through direct marketing and wherever they may be shopping for a loan. From there, businesses can begin the loan process with financial institutions completely online. Digital tools like e-sign and doc make it easier than ever to send information and receive signatures electronically for the efficient lending process businesses demand.
Integrating this solution with existing risk management systems even helps these lenders serve businesses deemed high-risk. With application data easily accessible, banks can review a business’s health and future outlook to determine its risk based on the big picture, not just one piece of information, like a credit score. By basing their lending decisions on comprehensive information, they may be able to provide more businesses with loans to expand their portfolio without taking on unreasonable risk.
GDS Link’s Modellica Engage solution can now be used for business lending. As an end-to-end loan origination and customer engagement solution, small banks and credit unions can cater to SMBs with a fully digital lending process. Begin expanding and enhancing your lending portfolio today.