Unlocking SMB Growth: Why Banks Need a Dedicated Loan Origination System for SMB Success

Over 33 million businesses in the US are categorized as Small and Medium Businesses (SMBs). These SMBs are the backbone of the economy, employing 35% of the private-sector workforce.  

However, a recent OnDeck¹ survey reported that 70% of these SMBs had less than four months of operating cash on hand. Furthermore, a 2024 Goldman Sachs² survey found that 77% of small businesses were concerned about their ability to access capital. Given this large market opportunity and the inherent demand from SMBs, why are banks not properly servicing this segment, specifically those banks with a local competitive advantage?

“….Why are banks not properly servicing this segment, specifically those banks with a local competitive advantage?”

In short, banks with outdated systems and manual processes can make the SMB segment unprofitable as a category and difficult to scale. SMB loans tend to be higher volume but smaller loan amounts that are done at lower bank margins and require quick fulfillment.

To address this challenge, banks are turning to advanced loan origination software tailored specifically to the needs of SMBs. 

This blog explores the challenges facing banks in supporting SMB loans as well as the key features and benefits of SMB loan origination software, highlighting how it can revolutionize the lending process and empower SMBs to thrive.

Understanding the Challenges of SMB Lending

Like many bank retail customers, SMB’s demand the best-of-both worlds.  Online digital experience with simple user interfaces.  Quick loan decision-making but always with the option for human interaction. 

However, legacy banking systems that require multiple person-to-person interactions often result in long approval times. This is because current underwriting processes, which require the same effort for multi-million-dollar loans internally, are mismatched to SMB lending.

Financial reviews could mean examining financial statements, which assess the company’s revenue, expenses, liabilities, and assets. Banks may also seek to understand the business credit worthiness and their historical use of credit. Finally, banks may request collateral and guarantees to help reduce their risk.

This could explain why small business owners explore alternative lending companies which often process loan applications faster and cheaper than banks. These alternative lenders or fintechs also offer more products tailored for the SMB space and reach more underserved markets that lead to growth in online financial applications.

“This could explain why small business owners explore alternative lending companies…”

But, fintechs charge higher interest rates on their loans and have lower borrower satisfaction.  A recent Small Business Credit Survey found SMBs are more likely to be satisfied with banks than alternative lending companies or fintechs³.  This may be in part due to the human aspect of bank lending which reinforces the built-in advantages community banks have over these alternative lending companies. 

Given this, what steps should banks take to stay competitive in the SMB market segment?

The Power of Advanced Loan Origination Software

Banks may compete with the adoption of modern software specifically tailored to the needs of SMBs. Solutions that empower banks to digitally transform the end-to-end process of loan origination. 

This SMB software is available today and provides a complete digital transformation that offers a wide range of features that can significantly enhance efficiency and customer experience. The necessary components of the SMB loan origination software include:

1. Omni-Channel Submission:

• • Flexibility: SMB borrowers can apply online, in-branch, or through a combination of both, providing a seamless and convenient experience.
  • Efficiency: Automated data capture and validation reduce manual effort and errors.

2. Self-Service Portal:

• • Empowerment: Borrowers can save and resume applications at their convenience.
  • Transparency: Real-time status tracking keeps borrowers informed throughout the process.
  • Reduced Friction: Self-service document uploads streamline the application process.

3. Straight-Through Processing:

• • Speed: Immediate approval for eligible online loan applications with auto-underwriting and auto-decisioning.
  • Efficiency: Reduced processing time and increased throughput.

4. Integrated KYC and Due Diligence:

• • Compliance: Seamless integration with third-party providers for identity verification, fraud checks, and OFAC screening.
  • Security: Enhanced security measures protect sensitive customer information.

5. Simplified User Interface:

• • Centralized Repository: Customer information is stored and shared across the bank, enabling efficient collaboration and decision-making.
  • Quick Review: Lenders can swiftly review applications that do not qualify for auto-decisioning.

6. Credit Analysis and Underwriting:

• • Comprehensive Assessment: Powerful credit analytics, including financial information and credit profile, enable informed decision-making.
  • Risk Mitigation: Enhanced risk assessment and underwriting capabilities.

7. Scalability:

• • Flexibility: A scalable platform that can adapt to changing business needs and increasing complexity.
  • Future-Proofing: Ensures the software can handle growth and evolving regulatory requirements.

8. Upselling Opportunities:

• • Cross-Selling: Integration with other banking products and services, such as deposit accounts and treasury management.
  • Increased Revenue: Enhanced customer relationships and revenue generation.

9. Robust Reporting:

• • Actionable Insights: Data-driven insights to improve decision-making and optimize processes.
  • Compliance: Ensure adherence to regulatory requirements through comprehensive reporting.
  • Efficiency: Streamlined operations and increased productivity.

The Benefits of Implementing SMB Loan Origination Software

With the infrastructure in place, banks may begin to reap the benefits of their digital transformation across their loan origination software specifically tailored for SMB’s that include:

• Improved Customer Experience: Faster processing times, increased transparency, and personalized service.
• Enhanced Operational Efficiency: Streamlined workflows, reduced manual effort, and automated tasks.
• Increased Productivity: Empowered staff can focus on value-added activities.
• Reduced Costs: Lower operational expenses and minimized errors.
• Enhanced Risk Management: Robust credit analysis and underwriting capabilities.
• Improved Compliance: Adherence to regulatory requirements through automated checks and controls.
• Increased Revenue: Cross-selling opportunities and higher loan volumes.

Conclusion

In this competitive landscape, banks must embrace digital transformations to stay ahead. By investing in SMB loan origination software tailored to the needs of SMBs, banks can streamline their lending processes, enhance customer experience, and drive profitable growth. This powerful software empowers banks to better serve their SMB clients, fostering economic growth and strengthening their position in the market.

¹ OnDeck Survey. https://www.ondeck.com/small-business-trends

² 10,000 Small Businesses Voices survey

³ 2024 Report on Employer Firms: Findings from the 2023 Small Business Credit Survey.” 2024. Small Business Credit Survey. Federal Reserve Banks.

Adam Bieser has over 25 years of experience in management, consulting, financial services, and software. In his current position as COO and Founder of Vikar Technologies, he oversees company operations and project execution, as well as Customer Success, and expansion of business with existing clients. Adam has led over 20 major financial institutions in optimizing and digitizing their processes for client-lifecycle management, KYC/AML processes, and loan onboarding. Adam holds an MBA from Fordham University, Gabelli School of Management.