6 Ways Technology is Changing Small Business Lending

By Ty Kiisel

Technology permeates every aspect of our lives. It’s changed the way we shop, the way we make a hotel reservation, or even how we hail a cab. And so it makes sense that technology also affects the way small business owners borrow capital to fuel growth and to fund other projects.

Advances in financial technology have not only changed the way many small business owners find a loan, they’ve changed the way traditional banking and non-bank lenders process and approve them. In this article, we look at six ways in which technology is changing financial services for small business.

[Related: What to Do When the Bank Says ‘No’ to Your Startup]

1. Connecting Borrowers and Lenders

Not too long ago, small business owners worked almost exclusively with their local bank. The bank advertised on the radio, on television, or on a billboard, and then it waited for a business owner to visit the bank, sit across the desk, and complete a loan application. Local bankers also knew that if you used their other financial services, it increased the chances of you turning to them when your business needed a loan.

This process hasn’t really changed much over the last 50 years. And, although these methods still exist today, many small business owners find their lending partners online—and that includes finding traditional lenders as well as online lenders.

Internet technology makes it possible to secure a small business loan from a lender thousands of miles away. What’s more, business owners can find financing designed to meet their specific business needs, often with financing options they might not find at their local bank.

The Internet also makes it possible (and easy) for small business owners to research their best options: read reviews, access case studies, and learn about the experiences of other borrowers. This information can help them decide whether or not to work with one lender or another.

2. How Lenders Evaluate Creditworthiness

Banks traditionally relied on metrics like personal credit score and collateral to determine whether or not a small business was creditworthy. Today, various technologies look at thousands of data points—including flow analysis, transactional data, and the public record—to create a profile of a company’s financial health. That kind of information gives lenders a better sense of a business’ financial position, and it helps them decide whether or not to approve a loan application.

This technology-driven paradigm could be good news for many borrowers who might not meet the rigid requirements of the more traditional approach. Without adequate collateral or the right credit score, those borrowers might not qualify for financing. Given the opportunity, businesses with healthy bottom lines often become excellent borrowers.

3. Simplified Loan Application

Using financial technology and data makes it possible to trash the reams of obfuscated paper documents associated with the traditional loan application process. In its place: a simple online application that’s quick and easy to complete.

That doesn’t mean that lenders aren’t making data-driven decisions. It means that underwriters have abandoned a manual, time-consuming process in favor of automation and technology. It lets them access important data quicker, and it helps them make decisions faster.

4. Approve Loans Faster

Thanks to financial technology, loan decisions that used to take days or weeks can now take place in minutes or hours. The benefits extend to both lenders and borrowers. Lenders can easily evaluate trends to learn which small businesses tend to be better borrowers and what potential pitfalls to avoid. That ultimately benefits borrowers because lenders can spend more time building relationships with business owners who are more likely to be approved.

Depending upon the specific borrower and the purpose of the loan, a quick “no” is often as valuable as a quick “yes.” Streamlining the approval process lets business owners react quickly to take advantage of growth opportunities or to capture additional profits. It also lets them look for other sources of capital more quickly if the answer is “no.”

5. Keep Loan Payments On Track

Many lenders, both traditional and online, use electronic debiting to automatically withdraw agreed-upon loan payments from their customers’ small business bank accounts. This can help small business owners to stay current with their loan—a critical component of establishing and building a strong business credit profile.

Additionally, we see more traditional lenders and online lenders offering a range of periodic payment options. That helps to spread the cash flow burden evenly over the entire month, rather than creating what’s often called a “lumpy” cash requirement at the end of the month. It also helps borrowers and lenders identify payment challenges sooner, so that they can adjust and accommodate for them.

6. Stay Connected

An online relationship doesn’t imply an impersonal relationship; just as meeting face-to-face doesn’t automatically result in a productive one. Technology makes it possible for online lenders to create long-term relationships with small business borrowers—despite any geographic distance—perhaps an even more useful relationship than a personal contact at the bank.

Lenders can build relationships with small business owners through email, newsletters, educational webinars, and informative articles that focus on their specific interests and needs. Using technology in this manner, a lender can establish trust with small business clients. And increase the likelihood that those small business owners will turn to that lender when they need access to capital.

Small Business Need Drives Financial Change

Small businesses across the country create two out of every three new jobs and hire roughly half of our friends and neighbors. The capital needs of those businesses drive all of the changes I described in this article.

Access to capital is one of the biggest challenges that small business owners face today, and technology makes it easier for them to finance the opportunities that fuel growth and increase profits.

Ty Kiisel, a contributing editor at online lender, OnDeck, focuses on small business financing tips and financial responsibility.