Since Q1 of 2020, businesses, especially smaller ones, have had to scramble to figure out how they can weather the COVID-19 pandemic and eventually come back at full-strength. We’ve all seen the boarded-up storefronts in our own communities and on the news, which creates increased anxiety that many of these businesses either will not reopen after the pandemic or will have a difficult time rebuilding. This can be partially attributed to the potential difficulty in the ability to receive loans and other forms of much needed capital that will help keep their businesses open.
What can small businesses do to gain an advantage in this environment? One answer is to embrace a digital lending process, which can allow them to save time by abandoning manual processes and gain much needed capital for their business.
According to the Office of Advocacy at the U.S. Small Business Administration (SBA), there were over 30 million small businesses in the United States in 2019, with close to 60 million employees. Even an assumption of 20% of businesses that were fully-operational in 2019 either temporarily closed in 2020 or were open in some limited capacity. By that estimate, we’re left with around 6 million small businesses that will have a significant decrease in their contributions to the U.S. economy or will be forced to completely close their doors.
These businesses do not want to close down and their decision to not reopen could potentially be attributed to multiple factors. But it’s likely that some of these closures will be caused by the lack of lenders and banks that will engage with these small businesses because they are often associated with high risks, sizable transaction costs, a lack of collateral, or maybe just a lack of rich data on that would paint a more complete picture of the business – about 50% of small business loans get rejected.
The credit-decisioning process, which refers to the internal procedures that are used to determine an acceptable credit risk for banks and other financial institutions, is poised to play a significant role in the upcoming economic recovery.
The Benefits of a Digital Lending Approach to SMB
It’s a critical time to ask what banks, fintechs, small businesses and other financial institutions can do to ensure that the lending process sufficiently improves in order to give small businesses a better chance for survival in an economically perilous time. Digital strategy sophistication is a key factor in how well lenders can meet the expectation of their small business customers today and tomorrow. Each lender has a unique business situation with varying abilities, challenges and access to resources with respect to a digital strategy. The key is moving towards better data and insights that provide a more comprehensive look at borrowers. This includes such things as cash flow attributes like credits, debits, and balances over a 24 month period pulled directly from the financial accounts.
Open banking is the platform that makes this digitization possible. Giving people and businesses more control over their financial account data. Digitization through open banking enables an experience that would only require the SMB borrower to simply permission access to their financial accounts. The result – the credit-decisioning process becomes more transparent between lenders and SMBs and is more efficient, more accurate and safer. This approach leads to quicker loan closings and a higher percentage of approved loans. Instead of gathering paperwork, making copies and waiting weeks for a decision, which means that tech-savvy entrepreneurs can apply online to accomplish these tasks, rather than work through their weekends.
Small Business Key to Economic Recovery Post COVID19
The way small businesses come out of this could have lasting effects on communities, which means that it’s imperative that lenders utilize better data and insights to look at how they determine creditworthiness. This approach can help businesses that are attempting to reopen or individuals who want to start a business. By utilizing their financial data to benefit them, small businesses have a chance for a better overall experience during their personal recovery, as well as making it easier to provide jobs to their communities which have been hit extremely hard by the pandemic and resulting economic downturn.
Steve Smith is the chairman, CEO and co-founder of Finicity. Steve has been involved in the technology industry for over 20 years as a CEO, founder and executive vice-president, among other roles. Prior to co-founding Finicity, Steve served as the Executive Vice-President of Operations at Megahertz Corporation. Steve holds a B.S. in finance from the University of Utah.
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