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Commercial Lending

The Evolution of Small Business Lending – Online and Mobile

Patrick True
Jul 14, 2017


The dynamics of small business lending have been changing rapidly over the past ten years. Born initially from the fintech lender movement, small business owners are now turning to online loan origination processes in greater numbers. Why? Having forged their expectations as consumers of personal loan and mortgage solutions in the early 2000s, these consumers-turned-business-owners now demand those same efficiencies in the enterprise arena. Two recent studies from the Federal Reserve Banks of New York and Cleveland point to clues regarding the nature of these businesses, as well as their preferences when dealing with financial institutions. The studies indicate that smaller businesses (those with annual gross revenue of less than one million) gravitate toward online lending in greater numbers than their larger counterparts. The most telling sign for the future, however, concerns the year-over-year satisfaction rates reported by small businesses between 2015 and 2016. Business owners participating in the New York study reported an increase of 31% in satisfaction with the online processes and results for that 12 month period. That is an amazing jump! And it should be setting off sirens in your financial institution. That kind of increase in client satisfaction is reminiscent of the move that Japanese auto makers made in the late seventies against U.S. manufacturers.

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Let’s take a quick look at some key results from these studies. The first graph provides some insight into the type of businesses seeking financing from online sources. As you can see, 83% of the applicants had sales of less than one million, 48% were less than five years old, and 54% were in growth mode.

Characteristics of Credit Applicants

This next graph speaks to the motivation behind applying for credit. As one might expect, given the business demographics above, the vast majority of applicants were seeking financing for business expansion.

Reasons given by business owners for Applying for Financing

The third graph addresses business owner rationale for choosing online application methods over traditional ones. The primary factors appear to have been, in order of importance, the “perceived chance of being funded,” “cost,” “speed,” and “flexibility.”

Important Factors Influencing Where Business Owners Apply for Financing

Again, one of the more dramatic findings from these studies was the year-over-year satisfaction statistics. Presented below are the results of the New York Fed’s 2015 and 2016 surveys. While traditional financial institutions still enjoy a significant margin, the gains made by online lenders in just one year are worth noting. As a source of competition, this segment of the market is clearly getting better at its game.

Lenders Satisfaction Score

2015 Survey

Lenders Satisfaction

2016 Survey

While the satisfaction numbers for online lenders had grown significantly, there was also strong evidence of a continued reliance on traditional financial institutions. Clearly, businesses still view these organizations as key advisors, and see their banker as a member of their small business counsel team. This is significant as banks seek to grow commercial lending and CRE portfolios in the years to come.

Sources for Financing Advice

So, what can we learn from this data? During the last seven years, entrepreneurs have been showing a preference for greater efficiencies through the deployment of online and mobile technologies. At the same time, as indicated by these surveys, relationships are still of significant importance. In other words, they want it all. They want their financial institution to meet them where they do business, which is increasingly online. But, they also still seek a friendly advisor who knows their business. My question for you is, why not give them both? Lending platform technology is currently in a state of rapid development and evolution. In the coming months and years, you will see traditional financial institutions utilizing this technology to effectively compete against online-only lenders while creating an even stronger lender/borrower relationship. The world of commercial lending is evolving – is your financial institution equipped for the change?

To read both studies in greater detail, access the links below.

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