The small business lending arena saw a flash of innovation towards the latter end of the aughts, fueled by a pullback from big bank lenders in the wake of the financial crisis. The B2B FinTech boom led to a wave of both competition and collaboration, creating new avenues to connect businesses to capital.
Today, it seems a new iteration of small business lending innovation is on the horizon. Both supply and demand are up, and technology is paving the way to forge even more paths to funding.
“PPP [Paycheck Protection Program] has come to an end and is starting to wear off in terms of its impact,” explained Sam Graziano, CEO of Linear Financial Technologies, in a recent conversation with PYMNTS. “As confidence in the small business base comes back, you’re going to see a lot more investment, and therefore a need for capital in the space.”
But small businesses’ lending needs aren’t the same as they were a decade ago — or, in some cases, even a year ago. The current climate presents a slew of challenges for traditional lenders, marketplace platforms, and alternative finance companies to themselves discover new roads to innovation and a better borrowing experience.
Ramping Up The Experience
According to Graziano, there is a spectrum of interest in ramping up small business funding among traditional, alternative and marketplace lenders. On one end, institutions are reinstating credit policies to pre-COVID risk appetites in an effort to drum up demand. On the other hand, some institutions remain cautious.
As a whole, however, there is evidence for a gradual rebound in both supply and demand for small business finance, but just because appetite may be returning to pre-pandemic levels doesn’t mean the industry will look the same as it once has.
For instance, the PPP initiative has made online borrowing a staple for small businesses, said Graziano.
“The main thing that [the pandemic] did was change the demand side,” he said. “Small businesses will probably be more accustomed to and willing to transact online. They did it for PPP, so why can’t they do it in the future?”
On the supply side, PPP uncovered several weak spots in lenders’ back-end workflows that will no longer be tolerated. Flexibility and agility are crucial, and as a result of elevating borrower demands, institutions are now facing pressure for faster decisioning, accelerating digitization, and access to robust data to support these initiatives.
That’s a tall order, considering how complex the small business lending workflow can be. Compared to consumer lending, which is generally more standardized and built upon a FICO score strategy, small business lending can be complex and take into consideration a variety of data sources.
“That’s often a journey for a lot of banks and non-bank lenders, to understand all of the different data sets that are available to help around fraud mitigation, Know Your Customer, credit, pricing, all of those different things,” noted Graziano.
Embedding Funding Where SMBs Operate
As banks and platforms navigate the maze of data to ramp up their financing abilities, the small business industry is also creating its own new landscape of ways to connect business borrowers to funding.
Since 2008, those paths have multiplied thanks to the emergence of alternative lenders, marketplace platforms that link businesses to a variety of funding sources, and the embrace of FinTech collaboration by banks to digitize the lending process for end-users.
There are still more paths to be forged, however, with embedded financing quickly becoming a massive driver of innovation in this space, according to Graziano.
“It is undoubtedly a major theme in this industry,” he said. “There is a huge opportunity there because small businesses’ mindshare is gravitating towards these platforms that help them run their businesses on a day-to-day basis or help them transact. Therefore, that is a very natural place to introduce banking and credit services.”
Indeed, as a provider of infrastructure, Linear is finding ways to work with clients other than traditional banks and lenders. Payments and B2B Software-as-a-Service portals, which have not traditionally operated in the lending space, have identified an opportunity to create ecosystems of tools for their small business end-users, with credit an increasingly popular addition.
Thanks to the development and maturity of application programming interface (API) technology, it’s easier than ever for these nonfinancial or nonlending platforms to embed a small business lending function. The data that can be found within these portals can also play an important role in underwriting as well. And with more small businesses looking for a consolidated digital experience — as opposed to hopping from one online portal to the next — embedded small business finance is finding a natural evolution in the market today.
This could certainly ramp up competition against traditional lenders, just as the post-economic crisis rise in FinTech lending initially did. Yet what Graziano emphasized is that this trend is instead opening up more avenues for lenders themselves to reach business borrowers and participate in these ecosystems.
Whether it’s enhancing internal infrastructure, or looping into someone else’s, small business lenders today can embrace plenty of opportunity for growth if, and when, they choose to jump back into the market.