According to the Thomson Reuters/PayNet Small Business Lending Index, small business lending is on the rise. In fact, in 2017 it rose by more than seven percent compared to 2016. But what does this mean? In the world of business, we often see a rise as a good thing, but in this case, it is far more complicated. Small businesses are far less resistant to economic conditions than large companies, and the rise of the commercial loans and leases to small businesses signals an early warning of the financial stress and risks. This doesn’t mean that entrepreneurs cannot find ways to make the most out of the current economic climate and take a responsible stand, by using the borrowed money for future growth.
There we have it, the big word – future – which is a vital thing to consider if you are planning on succeeding in any branch. So, let’s see, based on the current lending landscape, what does 2018 and beyond carry for small business loans?
Challenges to Small Business Lending
Before we move on to predictions, it is vital to understand the challenges of small business lending. One of the most persistent problems is that most banks still do not have effective practices and systems to determine small business risk and conduct lending activities based on those assessments.
Banks mostly use manual dated processes to collect information, which is very time-consuming. But even when the information is gathered, credited managers must spend a lot of time merging data from different sources, because small businesses rarely have a single source of credit information.
The scoring models that are used to assess the risk of a business lack credibility and often require manual overrides.
But this is not the end of mentioned problematic process. Even when a decision about the loan is made, there is a gap between the systems used to monitor, report, and document the performance.
Small business owners in search of a loan frequently lack in knowledge of the risks and the ways to improve their credit standing. As if that is not enough, they are facing the insufficient transparency of the bank’s expectations and assessment. The financial reporting after receiving a loan can be challenging due to complicated processes that require a certain degree of expertise.
But where does that leave us when it comes to the future of small business lending? Here are a couple of emerging trends to know about.
Climbing Interest Rates
According to The Biz2Credit Small Business Lending Index, July 2018 was marked by strong economic trends, which led to record high small business approval percentages at big banks, but all categories of lenders also performed well.
The slow climb of the interest rates has encouraged banks to lend and enabled businesses a more secure path to the needed money. There are no indicators that the interest rates will stop climbing at the same rate any time soon.
If this is true, and the interest rates continue to grow and the economy keeps up with that tempo, we can be optimistic about the landscape for both borrowers and lenders.
The Digitization of Processes
Many small businesses are started and run by millennials – a generation that is born into the world of technology and can’t imagine life without it. It is, therefore, safe to say that the banks will try to appeal to their clients by digitizing their services.
The branch banking will become less relevant in the near future, which will require partnering up with tech companies to enable them to digitize their transactions, including applications for business loans.
Small business owners are gradually migrating from branch banks, especially because they are often limited in staff and management, which requires working late hours and on weekends. Online applications allow them to manage their loans anytime they want, from their office or home.
The banks that have already jumped on the bandwagon will take the biggest piece of the market share, until the rest of them put the old-fashioned way aside, because millennials are running the playing field right now, and they are used to getting what they want when they want it.
Beyond the Standard Business Term Loan
The standard business loan is a go-to for many entrepreneurs. While it is a solid financial solution set up to meet a specific business’s needs, it is not the only option small business owners have.
There is a type of lending branch in bloom that collects offers from different lenders and matches you with one that suits you the best.
This way, small businesses are provided with an array of options that include short-term loans (flexible financing with one to three-year terms), merchant cash advance (borrowing against future earnings), commercial mortgage (funding to purchase, build or remodel premises), equipment financing, business acquisition loan (buying an existing business or franchise), and government programs for financing small businesses.
Blockchain Continues to Boom
The general public is still skeptic when it comes to cryptocurrencies, but if the recent skyrocketing value of bitcoin has taught us anything, it is that digital currencies are here to stay, and they are going to change the way we use money and do business, whether we like it or not.
Among other things it does, the blockchain technology keeps track of money transactions, transfers, and balances. This provides the unparalleled speed and effectiveness of transactions, which is bound to find affection amongst the millennial bank clients. In return, the demand for implementing cryptocurrencies in the lending process will drive the banks to find efficient and secure ways to use this trend.
Banks Must Lead the Way
As you might have concluded from this article, the banks will be the protagonists in this blockbuster of a rapidly changing market. To meet these challenges, they will need to adopt new tools and technologies, as well as develop new systems and processes for enhanced data collection, automated scoring, and transparent decision making.
The modernization of loan applications and the financial reporting system will need to be adapted to the largest group of loan seekers – millennials, which will require digitization and the introduction of blockchain technology into the banking world.
Finally, the offer of loans to small business owners will significantly expand due to diversified needs and business branches, because not every SB is after the same thing.The government incentives for some areas, such as energy-efficiency, are expected to play a significant role here too.
And what is most important for small business owners, the banks will still feel encouraged to approve loans, due to the steady climb of interest rates, optimistic economic climate, and increased public awareness about the relevance of small companies in the current business landscape.