3 steps to evolve as an alternative lender
Jorge Sun is CEO and co-founder of LendingFront. The opinions expressed are those of the author.
Alternative lenders differ from banks in that they do not have deposit balances, checking or savings accounts, mortgage payments, or other forms of significant cash flow. Their growth trajectory is based on one goal: to lend more. Many alternative lenders have impressive loan volumes, but most would find it difficult to scale their current systems, processes, and people to handle increased demands without increasing overheads or increasing staff.
Efficient growth is still possible despite these challenges.
Customers are available, especially small businesses moving into the next phase of recovery. Plus, scaling can happen without incurring overwhelming overheads, but it does involve a renewed commitment to digital transformation. And while there is no one-size-fits-all approach, there are key factors to consider when building digital capacity.
Step 1: Examine the landscape for opportunities.
Alternative lenders don’t have existing customers – it doesn’t exist. To successfully gain customers, they need a clear acquisition plan. A lender needs to show investors that it can acquire customers and then do it.
Fortunately, one segment of the market needs capital more than ever: small businesses. Even before the COVID-19 crisis put small businesses in a liquidity crunch, data indicated that this segment needed more capital due to the strong growth in recent years. As of January 2020, there were 5.1 million small and medium-sized enterprises (SMEs) in the United States and that number was growing by about 4% per year, according to a Accenture Report November 2019.
But as the SME category has grown, access to credit for sole proprietorships has not kept pace.
According to the Federal Reserve, in 2019, 53% of small businesses that sought capital received less financing than they wanted, and 29% found themselves with unmet financing needs. Traditional banks were less and less likely to be seen as the default solution. Less than half of small businesses have obtained funds from a bank in the past five years, while 22% received funds from online lenders in 2020.
The demand is there and growing, but lenders must be equipped to meet it. It means to scale quickly and overcome the overhead of composition.
Step 2: Innovate or die. Engage in digital transformation.
Growth isn’t as simple as making more loans – it’s a commitment of infrastructure and process.
Disbursing loans through traditional paperwork and manual process requires human capital – it’s a lot of time and investment. But, as businesses increasingly embrace online solutions and COVID-19 has required a digital switchover, now is the time for lenders to harness the power of technology and automation for a service. improved client, faster loan processing, greater transparency and lower costs.
It is assumed that alternative lenders need to be tech savvy, especially compared to traditional community banks. But this is not necessarily true. In addition to being “online stores” with no physical storefronts, the vast majority of alternative lenders – especially those struggling to scale and meet demand – are slow to embrace modern technology and struggle with financial challenges. disparate systems.
Digitally-driven organizations like PayPal and Stripe are equipped to respond to business needs almost immediately. Their touchless, streamlined and lightning-fast approach is perfect for this moment. For alternative lenders, the competitive pressure comes not only from banks, but other alternative lenders and digital giants with user-friendly processes.
A smooth digital process has become an entry cost for alternative lenders in today’s market.
Step 3: Choose the right digital solution.
If COVID-19 has taught us anything, it’s that pencil-and-paper treatment just can’t sustain a business. It doesn’t work for the lender or small business owner with an urgent need.
For alternative lenders looking to capitalize on existing demand and keep pace with digitally focused competitors, there are four crucial functions they must include in their digital solution:
Cross-platform access. Small business owners, like the rest of us, have become accustomed to doing many of their work tasks from the kitchen table, in the car, or on the road. Lenders should welcome clients who want to get a loan from a desktop, tablet or mobile device, meeting clients where they are.
Credit criteria specific to SMEs. Without processes tailored specifically for SME lending, the credit bar becomes too high for many small businesses that could be valuable clients. A complete digital, data-driven solution provides the flexibility and precision to assess small businesses against the most precise determinants of their industry’s creditworthiness. For the lender, this means being able to tap into the cash flow in real time.
Automating. A robust solution will allow a lender to automate the process as little or as much as they want, making every decision of their own, automated or not. Scoring of applications, two-way communication, bid presentations and electronic contracts can be automated. Automation also offers the personalization and service that customers expect.
Product structure and payment methods. With greater automation, a lender can provide multiple loan offers at once, in real time, and allow applicants to select the desired loan term, price, and amount based on predetermined parameters. Digital surveillance means greater ease and scalability without sacrificing compliance.
With the right small business lending solution and greater automation capabilities, alternative lenders can be equipped to fund more small businesses in a fraction of the time it used to take, even in a difficult climate.