Capital is the lifeblood of small business growth. When they need funds to grow, small businesses often turn to their community banks for reasonably priced loans. Ironically, it’s the pain of applying for a loan that can drive small businesses to leave their banks for another financial institution.
According to a recent J.D. Power report, “Fast-growing small businesses create both an opportunity and a threat for their banks.” Why? Because 22% of the fastest-growing businesses who participated in the study had switched banks within the previous 12 months. Another 25% reported they intended to switch banks in the future.
What’s driving this turnover? According to J.D. Power's Jim Miller, owners of fast-growing businesses are “more likely to need new loans and banking products, and that makes them look around at other options." The report goes on to note that "applying for a loan is also a critical ‘moment of truth’ for these customers.” Additionally, the report said that 61% of fast-growing businesses that applied for funding in the last year encountered enough problems with the lending process that they’d consider switching banks over it. Research conducted by the Boston Consulting Group in 2016 suggested that small businesses account for as much as 10% of annual bank revenue, meaning losing a small business customer would be significant.
So what’s slowing the traditional lending process for small- to midsize business (SMB) borrowers and banks — and how can innovative lenders clear these hurdles more rapidly? As the CEO of a digital lending platform, here are the four most common roadblocks I've identified.
Getting Borrowers Into The Bank
Traditional, paper-based loan applications are often available only at the bank — so borrowers must visit the bank during business hours to pick one up. While many banks offer downloadable PDF applications on their websites, if borrowers download that application after hours, they’ll have to wait until the bank opens the next morning to get any questions answered. Because small business loans require expertise that frontline banking staff may not have, borrowers may need to come back to meet with a specialist — repeatedly — to address questions and complete required paperwork.
All of that makes it easy for borrowers to give up on the loan process, quit their bank and seek speedier borrowing options, however expensive they may be. A digital lending process, in contrast, offers borrowers access when and where they need it — even after banking hours.
Gathering Underwriting Data
Traditional loan applications pull underwriting data from multiple sources, and each one has its own timeline. The back and forth of gathering credit information can eat up lots of hours and money when borrowers must tap their accountants for help. It can feel like a never-ending drip of requests: just when you think everything is complete, someone asks for another document.
For example, the IRS-required 4506-T can be one of the larger speedbumps in the process. (This form authorizes a third party to get tax information from the IRS.) Similarly, small business organizations often back loans and offer attractive terms to qualified SMB candidates. However, loan processes can feel both cumbersome and difficult to parse. Verifying that a loan application meets lender and backer terms can be a time-consuming process.
How can lenders bust through this roadblock? Automate the collection of underwriting data, fully encrypt the data and make it digitally available throughout the loan process. All of these things speed up, simplify and better secure the process for both banks and borrowers.
Verifying Completed Paperwork
Traditional small business loans require borrowers to complete paperwork — lots of it. And it’s a process few businesses are familiar with. If a borrower forgets to complete a document, that borrower likely won’t know about it until a loan officer points it out. That could mean more hours or days of lost processing time.
This isn't so with a digitized, omnichannel loan application that prompts borrowers to upload missing documents, saves their progress and is accessible from any device at any location. With digital applications, borrowers can start the loan application from their smartphones at night, add documents when they get to their offices in the morning and finish up with their loan officer if they run into questions along the way. Making important documentation available at a click or tap also accelerates the closing process.
Getting Declined For A Loan
According to a survey by the Federal Reserve Banks, only 46% of small businesses seeking business loans were approved for the full amount in 2017 — which means more than half of funding requests fall short or are denied outright. What’s the borrower’s next step if they fail to obtain the funding they need? Likely it’s starting the process over again with another lender, moving to another bank or pursuing alternative lending options. No wonder maxing out your credit card looks appealing.
One of the toughest challenges with the traditional loan process is that borrowers are often given no indication of why their application failed. That makes them more likely to repeat the “mistake” they made on the new application. Digitizing the lending process also demystifies it by flagging issues with the loan application as they arise and providing transparency to both banker and borrower throughout the process. Lenders who embrace digital solutions can also consider “second look” programs, which enable banks to offer additional loan options to qualifying small businesses. Through digitization, borrowers can bounce back from a declined loan more seamlessly than ever.
Removing Roadblocks With Digital Lending
Fortunately, many banks are breaking down these roadblocks for small businesses by digitizing traditional lending processes. A 2018 American Banking Association (ABA) study found 80% of banker respondents were interested in digitizing their small-business lending business. And 57% said they’d consider partnering with a digital lending partner to originate small business loans. Offering a faster, smarter and more secure lending process that streamlines small business lending can help grow small businesses. That’s a future we can all get excited about.
