With the rise of digital lending tools, credit unions are getting cornered from all sides when it comes to small business lending. From Amazon and Goldman Sachs to small but nimble innovators in the financial technology space such as Square and Stripe, competitive pressure is rising. So how can today’s credit unions defend their turf and create greater efficiencies across the small business lending process?
In this fast-moving digital world, credit unions can propel themselves ahead by using the advantages other players in the space don’t have. In particular, leveraging their relationships (and using technology to enhance those relationships) will play a pivotal role in bringing speed and convenience to the lending process.
Credit unions understand that member relationships are one of their core strengths. The recent flood of government-backed lending under the Small Business Administration’s emergency Paycheck Protection Program (PPP) has highlighted how important it is for small businesses to have these relationships during times of economic strain. Businesses that previously relied on other sources of funding suddenly found the flow of credit was tight, as secondary market-dependent companies came under funding pressure. Many borrowers learned some lenders are purely transactional, while credit unions are driven by the connectivity of relationships.
At the same time, relationships alone are no longer enough. Loyalty increasingly is tied to convenience, and convenience increasingly means the ability to get a small business loan quickly, remotely and even on the run. This requires credit unions to rethink how to engage with members through technology. Those that cling to outmoded processes run the risk of being left behind by members who are constantly barraged with opportunities to borrow faster, more conveniently, less intrusively and at more favorable prices.
Fortunately, change does not have to be costly, disruptive or time-consuming. Credit unions can adopt cloud-based digital lending with minimal interruptions, positioning themselves to provide decisions more efficiently while managing their credit risk and getting more loans across the finish line. But to do so, there are a number of important factors for credit unions to understand and consider in today’s lending environment:
1. COVID-19 is driving a need to change how lenders evaluate small business borrowers
Credit unions tradtionally use underwriting criteria that looks backward, not forward. However, last year’s financial statements, credit scores and asset valuations proved less relevant as COVID-19 destabilized the entire economy. But it is possible to look forward and make smart decisions on that basis. What matters in small business lending is not the business’s profit, but rather its real-time cash flow. Credit unions that have the technology to look at business banking accounts and glean a relevant snapshot of a small business’s revenue and expenses have the ability to understand whether the business is recovering or is in an irreversible decline. New ways of screening applicants and rating their creditworthiness are emerging, and digital lending solutions — through their ability to aggregate data from a wide variety of sources — are key to these developments.
2. Entrepreneurs value digital and mobile access matter more than physical branch locations
Local small business owners don’t work 9-5, so when they go looking for a loan, they aren’t going to bend to credit union hours. While there will continue to be a need for face-to-face meetings with members, the rise of digital platforms means these meetings can be less focused on completing transactions and more focused on providing advice and guidance. That’s something members will take time out of their day to receive.
3. Credit unions can harness technology to make smaller loans more profitable, but they have to move fast
Small business loans are generally defined as loans under $1 million. Many lenders say it is difficult to turn a profit on loans under $100,000, but businesses need these loans, and that means many credit unions are either passing on the opportunity altogether or making the loans at a loss. Through the use of technology, credit unions can better streamline the process and significantly reduce the average cost of processing small credit requests.
4. Credit unions can make productivity gains when they shift to the right digital lending technology
Bringing automation to the lending process frees up lenders who used to spend their time chasing down missing documents to ensure a complete application. Liberating lenders from the mechanics of the loan application means they can focus on bringing in larger deals that are more valuable to the credit union or on engaging directly with their most important members. When lenders can develop new relationships and deepen existing ones, they can get more done without undertaking the expense of expanding the staff.
5. Standing out from the competition
Choosing the right digital lending solution can transform a credit union into a real player in the competition for vital small business relationships. Credit unions need to be able to efficiently meet the capital needs of small businesses, and that includes finding ways to approve small credit requests more efficiently. By digitizing the lending process, members don’t have to speak with a loan officer during every step of the process. Likewise, credit unions can embrace automation without ceding control or increasing risk. They can do it seamlessly, while maintaining their identity as the member’s financial institution of choice. And with the right digital solution in place, credit unions can mobilize their lending officers to spend more time pursuing new business and processing the larger, more complex capital requests.
