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 cause small businesses to leave their banks for another financial institution.
According to a recent JD Power rreport, “FSmall, growing businesses create both an opportunity and a threat to their banks. Why? Because 22% of the fastest growing companies that participated in the study changed banks in the past 12 months. Another 25% said they intended to change banks in the future.
What is driving this turnover? Fast-growing business owners are “more likely to need new loans and banking products, which prompts them to consider other options,” says Jim Miller of JD Power. a critical “moment of truth” for these clients. Additionally, the report says 61% of fast-growing businesses that have applied for financing in the past year have had enough trouble with the lending process that they are considering switching banks. Research conducted by the Boston Consulting Group in 2016 suggested that small businesses represent up to 10% annual bank income, which means the loss of a small business client would be significant.
So what is slowing down the traditional lending process for small and medium-sized enterprise (SME) borrowers and banks, and how can innovative lenders overcome these hurdles faster? As the CEO of a digital lending platform, here are the four most common obstacles I’ve identified.
Bring borrowers to the bank
Traditional paper loan applications are often only available at the bank. Borrowers must therefore go to the bank during business hours to withdraw one. While many banks offer downloadable PDF apps on their websites, if borrowers download this app after business hours, they will have to wait until the bank opens the next morning to get their questions answered. Since small business loans require expertise that frontline banking staff may not have, borrowers may need to return to meet with a specialist – on multiple occasions – to answer questions and complete required paperwork.
All of this makes it easy for borrowers to drop out of the lending process, leave their bank, and look for faster borrowing options, no matter how expensive. A digital lending process, on the other hand, gives borrowers access when and where they need it, even after bank hours.
Collection of subscription data
Traditional loan applications pull underwriting data from multiple sources, and each has its own timeline. The Going back and forth to collect credit information can consume a lot of time and money when borrowers have to turn to their accountants for help. It can feel like an endless stream of requests: just when you think it’s all over, someone asks for another document.
For example, IRS required 4506-T may be one of the biggest speed bumps In the process. (This form authorizes a third party to obtain tax information from the IRS.) Likewise, small businesses often support loans and offer attractive terms to qualified SME applicants. However, loan processes can seem both cumbersome and difficult to analyze. Checking that a loan application meets both lender and lender terms can take a long time.
How can lenders get past this roadblock? AAutomate underwriting data collection, fully encrypt 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.
Verification of completed documents
Traditional small business loans require borrowers to go through much paperwork. And it’s a process that few companies know about. If a borrower forgets to fill out a paper, they probably won’t know until a loan officer reports it. It could mean more hours or days of wasted processing time.
This is not the case with a digital, omnichannel loan application that prompts borrowers to download missing documents, records their progress, and is accessible from any device at any location. With digital apps, borrowers can initiate the loan application from their smartphones at night, add documents when they arrive at their desks in the morning, and finish with their loan officer if they encounter any questions along the way. Making important documentation available with a single click also speeds up the closing process.
Being refused a loan
According to a investigation By federal reserve banks, only 46% of small businesses seeking business loans were approved for the full amount in 2017, meaning more than half of funding requests either fail or are denied outright. What’s next for the borrower if they don’t get the financing they need? This is likely a matter of starting the process over with another lender, changing banks, or researching other loan options. No wonder maximizing your credit card sounds appealing.
One of the most difficult challenges with the traditional loan process is that borrowers often receive no indication of why their application has failed. This makes them more likely to repeat the “mistake” they made on the new request. Digitizing the lending process also demystifies it by flagging loan application issues as they arise and providing transparency to both the banker and the borrower throughout the process. Lenders who embrace digital solutions may also consider “second look” programs, which allow banks to offer additional lending options to qualifying small businesses. Thanks to digitization, borrowers can recover from a denied loan more easily than ever before.
Remove obstacles with digital lending
Fortunately, many banks are removing these barriers for small businesses by digitizing traditional lending processes. A 2018 American Banking Association (ABA) to study found that 80% of bankers surveyed wanted to digitize their small business lending business. And 57% said they would consider partnering with a digital lending partner to provide small business loans. Providing a faster, smarter, and more secure lending process that streamlines small business lending can help small businesses grow. It’s a future we can all look forward to.