By Marius Silvasan, CEO of eCapital
In the often tenuous small and medium-sized business (SMB) world, access to timely and flexible financing can be the difference between survival and failure. In fact, nearly one-third of small business respondents to a Slack survey early this year said they’re worried their business will not survive to see 2025.
Banks have historically been the first call for SMBs searching for funding, but those doors are closing. Banks have traditionally not catered to SMBs, and small business loan approval rates from big banks stood at just 13% in October 2023.
Banks have never particularly liked doing business with SMBs. The perceived risk is high, and the paperwork for SMB loans is about the same as for large ones. Encumbered by outdated technologies and slow-moving processes, traditional banks struggle to meet the often urgent financing needs of SMBs.
The Limitations of Traditional Banks
The traditional bank loan process is often slow and cumbersome, involving extensive paperwork, in-person meetings, and long approval times. Borrowers need to contact a local bank branch to make an appointment with a loan officer. A week later, they go in to fill out a bunch of forms. From there, it can take anywhere from a couple of weeks to a couple of months of back and forth as due diligence questions and comments are addressed.
Once the loan application process is completed, it can take another two weeks for borrowers to find out if they’ve been approved. At that point, loan documents finally get issued. With luck, they’ll have a check within a month, though not necessarily for the full amount of the loan requested. These lead times are simply not viable for a growing business experiencing a cash flow crunch.
Furthermore, banks typically have strict lending criteria that can be prohibitive for many SMBs. Factors such as lack of collateral, short business history, or less-than-perfect credit scores can make securing a loan very challenging. Paper applications don’t capture the full range of value a small business brings to the market, including intangible assets like customer loyalty, community relationships and growth rate.
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Digital SMB Lending Platforms Fill the Gap
The shortcomings of traditional bank lending have given rise to modern digital lending platforms that offer the speed, convenience, and flexibility that today’s businesses demand. As the gap between what SMBs need and what banks offer has widened, a host of non-bank, digital lending platforms are seeing a prime opportunity to fill it.
These financial technology (fintech) lending platforms – designed with the SMB in mind – leverage automation and artificial intelligence (AI) to streamline the lending process, making it faster, more efficient, and more accessible. In many cases, lending services are integrated with other software they already use, a convenience called “embedded finance.” This allows a boutique retailer, for example, to extend credit terms to customers from within its e-commerce platform and collect payments immediately.
With nearly half of small businesses planning to seek capital this year, this new breed of lenders and their modern, tech-forward approach are poised to capture this underserved market and help fuel economic growth.
The platforms are typically self-service, on-demand and often accessible from a mobile phone. SMB owners can apply for loans online anytime, anywhere, without lengthy paperwork or in-person visits. The application process is straightforward, requiring only basic information about the business and its financials.
Digital lending platforms can often provide funding within hours or days. Automated systems assess loan applications in real time, using algorithms and machine learning to determine creditworthiness. Loans can be approved in hours. In comparison, a loan backed by the U.S. Small Business Administration takes between 30 and 90 days once the loan application process has been successfully completed in full.
Flexible, Modern Financial Solutions
Digital lending platforms offer a variety of products tailored to SMBs’ diverse financing needs, such as short-term working capital, equipment financing, or invoice factoring. Solutions can usually be customized to fit a business’s specific requirements. That means SMBs can choose financing options that align with their cash flow and operational needs rather than the rules set by a bank.
How do fintechs do it? To begin with, everything is digital. Whereas banks must maintain hidebound legacy processes rooted in paper while transitioning to new ones, digital lending platforms have designed workflows from the ground up to take advantage of self-service, data-driven automation and connections to other services such as loan origination systems, customer relationship management, pricing engines, credit providers, and document automation services.
There are cultural factors as well. Banking has traditionally been based on relationships. Fintechs assume customers are less interested in relationships than in getting fast access to cash. Many SMB-oriented platforms specialize in one of the most pressing issues for SMBs: managing cash flow. Unexpected expenses, delayed customer payments, and seasonal fluctuations can create enormous financial strain on small businesses. Specialized digital lending platforms provide quick access to working capital that can smooth out these disruptions.
SMB owners like using digital platforms. The convenience and efficiency let them focus on running their businesses and less on dealing with confusing financial paperwork. There are no branch visits, awkward meetings with loan officers, or onerous documentation requirements. Aggregation services even let SMB owners simultaneously apply to multiple lenders competing to serve them.
Now isn’t that a nice break from tradition?
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