Business Lending is Ripe for Disruption. Is Your Bank Ready?

Traditional lending involves plenty of paperwork and long approval times, delaying loan approval anywhere from several days to several weeks. These delays push borrowers to lenders – not all of them financial institutions – that can approve and fund credit more quickly.

Financing Isn’t Fast Enough.

In today’s on-demand world, no response is often worse than a negative response. Who wants to wait wondering about the status of their loan application when they need financing yesterday?

Many financial institutions still rely on manual lending processes that involve human data entry or re-entry, which can lead to errors. In other cases, systems like analytics and underwriting platforms aren't integrated, causing additional re-entry of data. Community banks often use outdated methods for collecting and verifying documents. These inefficiencies slow down both lenders and the final approval or rejection of credit requests.

While such processes may have worked in the past when credit applicants had no choice but to wait, today's digital technologies allow fintechs to approve and fund loans quickly. Small businesses now expect the same speed from community banks.

Although the banking landscape is evolving with fintech advancements, community banks have a key advantage: deep connections with the local community. They offer personalized care and understanding, but if they can't match the speed and convenience of their competitors, they risk losing business to larger institutions or fintechs specializing in small business lending.

Most online lenders have designed systems to fund approved loans within a few days and for basic credit requests, funds can be disbursed within 24 hours. Comparatively, small businesses who apply for loans at traditional banks cite frustrations with the “difficult application process” and “long wait for a credit decision,” according to the Federal Reserve.

Innovate to Accelerate.

By using today’s technology to automate many of the mundane, repetitive processes, community banks can seriously accelerate the decisioning and funding process, especially for credits that are easy approvals (excellent credit, good cash flow, etc.).

A golf analogy is a great way to look at this - some loan requests are like a drive that lands straight down the fairway. The borrower has a strong DTI, cash flow and a solid credit score. The loan request is under a certain dollar amount. Meanwhile, other requests may land in the rough. It could be because the credit request is larger or more complex, or there are concerns about the borrower’s ability to repay. Those are the requests that need more attention from a credit analyst before a decision is made.

When bankers can spend less time on those fairway opportunities, they can focus more on the opportunities in the rough that could prove to be worthwhile. Technology can free up some precious time to do just that.

For example, machine learning can analyze vast amounts of data, identify patterns, and make predictions to improve the accuracy and efficiency of the underwriting process. This can support a segmentation strategy for decisioning loans, where certain thresholds and rules are set to move loans through the origination process in a more automated way.

Digital communication tools can also help address inefficiencies in document collection and verification, as well as enhance engagement between lenders and borrowers. This keeps loan applicants informed of their application status and updates, eliminating the delays and frustration that comes with telephone tag.

Digital Doesn’t Have to Mean Distance. It Means the Opposite.

While there may be concerns that digitizing aspects of the lending workflow puts distance between a bank and its customers, it’s actually the opposite. The key is blending the bank’s deep understanding of local businesses with the right technology to provide applicants with the speed, efficiency and convenience they receive from today’s top brands.

Community banks understand the pain points of small businesses and simply need better tools to address them at scale. Many small businesses work on thin budgets and tight cash flows. So, when they need funding, they need it quickly.

When businesses can access funds faster, they can take advantage of time-sensitive opportunities such as a drop in raw material prices or a sale that is available only if the business can scale up to meet the product or service need. These opportunities can change business trajectories and the lives of entrepreneurs in a positive way.

Our very own CEO met a woman who owned a fishing company in Hawaii and had a stellar reputation for delivering high-quality fish to local restaurants. She was originally stymied in her expansion attempts because she was unable to meet traditional lending criteria.  Despite this, she has since become the largest producer of high-end fish for restaurants on the island of Kauai -- a missed opportunity for the financial institutions she initially sought financing from. Helping customers during challenging times is the biggest contributor to customer loyalty.

Community banks must continue to provide what the larger financial institutions and fintechs cannot – a deep understanding of their local businesses and local economy, but with the improved responsiveness and efficiency today’s digital tools can offer. When this happens, everyone grows. And when banks grow, they can invest more in the communities they serve, which is what community banking is all about.

Author Bio

Baker Hill empowers progressive financial institutions to increase revenue, reduce risk, and drive more profitable relationships.

Streamline business, consumer direct and indirect lending with our common origination platform. Understand profitability and risk at every level with our sophisticated business intelligence and analytics. Monitor and maintain a healthy financial portfolio with our statement analysis, exception, and risk management solutions.

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