Small- and medium-sized businesses (SMBs) play a critical role in today’s global economy, with recent data showing SMBs employ close to 47% of all US employees, and are major contributors to innovation, job creation and overall economic growth.1
With 5.1M new businesses created just last year,2 financing opportunities within this market would seem abundant. That said, typical lending practices used for larger enterprises become more complex and expensive when applied to small businesses, disincentivizing lenders from targeting the SMB market. In fact, less than half of small businesses said their financing needs are met.3
It's clear the significant gap in the SMB market holds opportunities for lenders — but as long as there are roadblocks around small business lending, potential revenue is being left on the table.
The challenges of underwriting SMB loans
Financial institutions interested in growing their SMB portfolios face a unique set of challenges. While SMB loans differ significantly from traditional loans, the same underwriting process is applied to both. There is no such thing as a business equivalent of a consumer credit score, though if there was, most SMBs seeking financing are newly established and therefore, lacking in sufficient credit history. With little to no business credit data to work with, lenders can’t easily discern their borrowers’ likelihood for success — an added cause for concern when lending to a segment known for its high turnover and failure rates.
It's not difficult to see why traditional business underwriting can lead to unfavorable outcomes for lenders and small businesses alike. Lenders are forced to rely on high-cost, resource-intensive manual reviews, while good businesses might be declined for not checking certain boxes. Plus, it’s not uncommon for SMB owners to use personal financial products as stop-gaps — which can hide risk in the system and expose lenders further.
Easy solutions for more secure small business lending
Fortunately, there are options lenders can explore to securely drive growth in an untapped market, such as underwriting loans based on the SMB owner’s personal credit history. This offers multiple advantages: The risk is more easily exposed; SMB owners are discouraged from inappropriate use of consumer credit; and companies don’t have to be pre-established to qualify. This method also involves a faster, easier application process, generating a better experience for customers and lessening resource strains on lenders.
To that end, lenders looking to invest more time and resources in their small business lending goals and operations will want to pay attention to the following:
Identifying and reaching eligible SMB owners
Without a robust, searchable national database for small businesses, targeting and verifying eligible applicants can be difficult. The good news is the right marketing and business verification solutions go a long way in improving marketing effectiveness — from leveraging credit-informed marketing to increasing targeting acquisition capabilities to identifying SMB-associated consumers via regular consumer portfolio reviews to targeting offers to those most likely to respond.
Improving the speed and quality of SMB risk decisioning
All lending involves striking the right balance between managing risk and driving revenue — but when it comes to higher-risk products like SMB loans, lenders tend to focus more heavily on the side of fraud prevention. With the right credit risk and fraud prevention solutions in place, lenders can reduce fraud losses while continuing to increase conversions and drive customer satisfaction. That includes everything from expedited approvals (thanks to faster consumer identity verification) to smooth authentication experiences across digital channels to leveraging traditional and alternative data to assess a borrower’s creditworthiness.
Proactive account management
When it comes to predicting delinquencies within SMB portfolios, lenders must rely on more than traditional monthly credit data. By taking steps to enhance account management practices, lenders can more easily monitor updates to mitigate potential losses. This involves enabling alerts around credit behavior and health changes, enhancing the effectiveness of outbound communications with customers, and accessing the insights needed to locate individuals and recover assets.
To learn more about how TransUnion can support your SMB lending efforts, check out our Playbook for Small Business Lenders.