LendIt Guest Blog: Small business lenders must innovate or risk falling behind
Originally published on LendIt Fintech News
Access to capital has always been a challenge for small businesses. Lenders need to assess a business’s credit as part of the loan origination process.
Yet, research shows that 47% of lenders still use a manual process that relies on borrowers sharing their data via PDF bank statements, balance sheets, emails, and spreadsheets.
Collecting and reviewing this data can take a few weeks, making the decision-making process extremely time-consuming.
Manual processes sometimes yield limited information, and with little information, banks can’t run analytics to help them better understand the small businesses’ cash flows.
What’s the result? Lenders who don’t have the data to assess a business’s creditworthiness, price loans accurately, or tailor products and services for a specific borrower.
Switch from manual
Lenders can provide small businesses with highly competitive services by switching from manual data collection to open finance-enabled technology.
Open finance creates a fundamental shift for lenders since the underwriting process leverages automation and other innovative technologies to unlock new insights and opportunities.
There’s a significant gap when small businesses can get the funding they need, and technology closes this gap for small business lenders that don’t want to be left behind.
Few lenders incorporate accounting data into their processes. Of 1,000 lenders surveyed by LendIt Fintech, only 15% used direct feeds, with 33% of those making their lending decisions in a few days.
Lenders that make faster loan decisions use API connections to connect with small businesses.
With a seamless data connection, the data is always available. The lender sends a link to their client, and the client logs in through their accounting software, essentially opening their electronic books.
As the business updates its data, the lender’s data is refreshed, providing real-time access to their financial picture. Now, lenders can analyze the cash flow of a small business and project forward-looking data.
Making this change to open finance takes planning as there are new processes and technology. Here’s what a lender should consider:
Automate processes
Most banks look for higher-balance loans as their manual processes are costly. Smaller balance loans are often overlooked, which is an opportunity for fintechs.
By sharing data via an API, lenders can access real-time data and project the business’s future cash flow and respective income.
The underwriting and decision-making processes are faster, and for loans with questionable credit, the lender can continue to monitor the business to ascertain whether to make future loans.
As technology drives the underwriting process, lenders have lower overhead costs, making smaller balance loans profitable.
Monitor potential borrowers
Lenders that rely on data sent to them by the borrower may be using older data to analyze credit. Accountants might take time to send over records, or the business’s cash flow is starting to show a different trend than what’s reflected in the statements.
With real-time data, lenders can monitor potential borrowers and work with them as their balance sheet evolves and future lending opportunities come to fruition.
Develop effective credit models
Traditional underwriting relies on static data collected during a specified period.
However, these models aren’t forward-looking because they can’t easily incorporate projections into their analysis. Models that accurately predict the financial health of a business take time to develop and maintain.
Cash-flow-based lending relies on real-time data, while asset-based lending relies on financial statements at a point in time. Models based on real-time data need to reflect the changing nature of a business’s balance sheet.
Understanding how this affects a business’s credit and whether an opportunity to lend exists is critical.
Create better customer journey
Lenders that use a digital platform can build better customer journeys for the loan application process.
Rather than requiring the borrower to submit various files and other electronic or paper documents for different sources, the borrower logs into their accounting system and transfers their data via an API to the lender.
The process is seamless and straightforward, and the borrower doesn’t have to track down any documents that they may not have in-house.
Create employee opportunities
A different underwriting process requires employees to operate in an additional capacity. With open finance, employees have the opportunity to shift their focus to a different type of role, like account manager or financial reviewer.
Now, an employee can spend their time looking for red flags in a customer’s business that’s struggling instead of looking for red flags for denial.
This shift enables employees to become small business experts with deep knowledge of various business models and potential problems.
Understand new technologies
The world is changing, and open banking impacts both consumers and businesses. Rather than transcribing data in electronic documents, new technologies can import data from one system to another to create opportunities.
Businesses need funds to grow, and they often need these funds fast. Utilizing an alternative data stream will augment workflows so lenders can make decisions quicker and disburse loan proceeds more quickly.
Wholesale changes to processes can create problems, but introducing new technologies and procedures can significantly impact a lender’s loan portfolio.
When small businesses have access to capital to flourish, everyone is better off.
Originally published on LendIt Fintech News
