Small businesses are uncelebrated customers for the banking industry. Though overshadowed by big companies, they remain the key players in the overall loan business. Yet banks— so far the largest small business lenders— are still maximizing the opportunities that micro-business funding offers. Figures by the IFC point to a global financing deficit of nearly $2.1 to $2.6 trillion, equal to 30-36% of outstanding micro-business credit.
But some financial institutions are still reluctant to help out small businesses mostly because of the difficulty the face trying to assess the customers’ true credit risk profile. Plus, it is quite complex and costly to prepare, process, and disburse micro-business loans.
The rise of alternative financing
Alternative lenders spotted the gaps in small business lending and came in with specialized and innovative funding solutions like ach merchant advance funding. Some loan providers offer a better experience, forgiving underwriting procedures and faster disbursement which has made them more popular in the market.
Banks, however, have remained the number one source of business funding for small business owners even as alternative lenders threaten to steal away this position. In a banking report by Oracle, a whole 30% of entrepreneurs who haven’t tried non-bank loans said they are willing to apply for them.
How banks can keep up with alternative lenders
Banks can stay competitive if they take care of the following customer needs that alternative lenders are already providing:
Assess unconventional data: Banks should be able to understand a startup’s business plan and draft some cash forecast out of it because most new micro-businesses have not built enough credit history or public info that can be used to determine their creditworthiness.
Attend to diverse credit needs: To boost up working capital, micro-businesses want a wide range of credit solutions. They also expect banks to be able to offer customized credit resolutions for specific situations in business.
Pre-accept credit lines during on-boarding: Banks should involve tech that can capture and calculate financial data, pre-accept and set a maximum cap for a range of credit opportunities during on-boarding.
Encourage open APIs: Correctly executed APIs can come with a range of benefits. APIs can help bank gain insight into putting up ground-breaking applications in-house or work with third parties to attend to the unique needs of Micro-businesses.
Conclusion
Banks will only retain their title as the primary small business lender if they offer capabilities that their alternative lending counterparts already provide.
