By Chris Rentner
Yes, it’s true, small businesses are turning to alternative funding solutions to secure loans. Yes, the numbers are scary for those of us in banking. As online small-business loans skyrocket (up more than 250 percent in the last 12 months), bank small-business loans are faltering. But, new tech-savvy SaaS (software as a service) providers are helping banks to reposition themselves as the best option for smaller loans.
Let’s look at why small-business owners are turning to online lenders in the first place. We know it’s not that friendly neighborly service or low interest rates!
Minding their business
Imagine you are a small-business owner. You spend 80 percent of your available time drawing blueprints, arranging native plantings, sealing leaky pipes—when you aren’t signing contracts, submitting bids, ordering supplies. It’s no wonder that payroll, accounting, and banking all are done online. There’s simply no time. Online service provides user-friendly processes and 24-hour, seven-day access. Whether providing accounting or messenger services, vendors that support small businesses have to be nimble and quick.
But every banker knows that managing the lifecycle of a loan is arduously labor-intensive. You have to collect borrower information, process and review the application, monitor and service the notes, all of which requires human resources—time that could be better spent building and maintaining relationships. And, we expend pretty much the same amount of effort for a $25,000 loan as for one that is $5 million. We can’t justify investing those kinds of resources for a skimpy return-on-investment.
So, even though loans $250,000 and less are the second-largest loan market in the country—we’re talking about billions and billions of dollars—smaller banks and don’t have the bandwidth to chase down and maintain these small loans.
Sixty-two percent of small-business owners who needed a small, short-term loan said it was faster and more convenient to use an online lender.
Bigger isn’t always better
Banks are the weightlifters of the financial world. Focused entirely on growth for generations, we are mighty, but at the expense of speed and flexibility. Our girth sometimes hampers our reflexes, our ability to course correct. Online lenders are acrobats: agile and fast. Because they are free from what can oftentimes be outmoded and maze-like infrastructure, they can support small loans with streamlined efficiency. So, while online lenders make loans faster and easier, banks are losing out.
There’s a price for everything though, and small businesses that obtain online loans must deal with exorbitant interest rates. So, even with the convenience online lenders offer, almost half of the under $250,000 loan market is unfunded.
An estimated $100 billion each year in loans go unfunded because small-business owners can’t get them from banks or won’t get them from an online lender.
The new generation of SaaS technology is positioning banks to compete with online lenders and tap the small-business loan wellspring. They are developing platforms to provide smaller banks ($250 million to $20 billion in assets) with the ability to engage applicants that walk into their branches: a frictionless experience and a simplified application process.
It’s a win-win. Banks gain the tools they need to provide customized small-business loans to their customers, and small businesses get the loans they need, quickly, efficiently, and at a reasonable rate.
But, before you sign on that dotted line, SaaS providers vary, and it’s important that banks find a reputable partner that provides smooth, seamless service, but is safe, provides banks with the metrics it needs, and makes the process quick and comfortable for both the financial institution and the customer.
Nine Essential Questions to Ask Your SaaS Provider
- Will it provide real-time verification on each business owner and firm?
- Will the bank receive applicant information and third-party data so it can generate an easy-to-understand score based on internal credit policies?
- Will it implement an underwriting risk model that aligns with your bank’s risk profile?
- How quickly can it turn around an underwriting decision for a customer? Can it do so in less than 48 hours?
- Does the provider make “single-click” CIP checks possible?
- Will it be able to search by census tract in your assessment areas so you may fulfill more CRA and Fair Lending requirements?
- Does it have flexible lending plans, creative lending solutions, or technology-driven underwriting systems that meet the requests of examiners and regulators?
- How safe is your information? Is it encrypted at rest and in transit? What kind of document storage is provided? Are intrusion detection systems deployed network-wide?
- Does the service provider meet the unique needs of a bank your size?
All it takes is some strategic tech for banks to capitalize on the tremendous potential of the small-business loan market. Rather than dealing with a white-label product from an outside institution, or referring your depositors and business customers somewhere else, a reputable SaaS provider integrates with your systems to keep small-loan customers in-house so banks don’t have to turn away good clients.
Chris Rentner is the CEO of Akouba Credit, Chicago, which provides cloud-based SaaS platforms for banks.