Small and Medium-sized Enterprises (SMEs) are the backbone of any developed or developing economy. Loans to this sector are important for banks not only from a compliance perspective but also for maintaining their portfolio of low-risk loans. To close the existing credit gap, the SME lending commercial finance sector is increasingly witnessing innovation across supply chain, origination, loan servicing and portfolio management.
Some banks are already reinventing business models by offering value-based and need-based segmentation models. In such a scenario, banks need to transform SME Lending due to increasing competition, changing regulations, and evolving customer expectations and technology.
If you are a midsize bank, you cannot overlook what’s happening in the small business banking space. The recipe to success lies in unifying small business lending offerings and providing a customer experience that your prospects and customers cannot ignore.
Opportunities or Threats for SME Lenders?
Irrespective of the regional differences in SME commercial finance, banks across regions continue to face certain key challenges
The Challenges for SME Lenders are Real
- Small business loans are considerably less profitable and riskier than large business loans
- Assessing the creditworthiness of small businesses can be difficult due to information asymmetry
- Costs of underwriting small business lending are also high due to the heterogeneity of small businesses and lack of a secondary market
- Transaction costs to process a $100K loan are comparable to a $1 million loan, but with less profit
Source: Harvard Business Review
Changing Business Models
The rise of equity models and the complexity of technology business models have made it difficult for banks to cope up with the expectations of small and growing businesses of today. Most technology entrepreneurs today prefer equity to debt, and traditional models of financial performance assessment are getting an overhaul (The much revered 2:1 debt-equity ratio, for instance, seems lopsided even for more established digital and technology enterprises). And, this is more pronounced in the European and UK market.
Smaller Margins
Small business loans and SME loans provide for much lesser margins with much higher expectations on speed and volume. At the same time, lending products need to be competitive in market, while being differentiated in offering as well as customer experience. This puts enormous pressure on strategic speed as well as transactional requirements for banks.
Elusive Straight-through Processing (STP)
Despite all the efforts to achieve straight-through processing and operational efficiency, banks continue to spend significant time and effort on manual and error prone activities, and are not able to free up the valuable time of relationship managers
Increased Competition
Marketplace lenders (MLPs) and peer-to-peer(P2P) lenders have started making a dent in lending market share of traditional banks. While larger corporates might still seem relatively safe from the P2P lending and MPL onslaught, small businesses are prime candidates for these alternate lenders.
Change of Focus
In the last few years, increased regulatory pressure and conservatism shifted the focus of banks towards cost efficiency and compliance. Banks have suddenly found themselves ill-equipped to handle the demands of fast paced environment with higher expectations on customer experience & speed of closure.
Siloed and Disparate IT Systems
From IT perspective, heavy reliance on siloed and disparate systems continue to be a source of inflexibility and disadvantage in a digital economy, even more for SME lenders.
Drivers of SME Lending
Customers and Revenue
The revenue in small business lending depends on larger volumes and repeatability in order to cope with the smaller margins. At the same time, from a customer standpoint, the relationship and speed of disbursal is critical.
Operational Efficiency
Straight-through processing of repeatable and routine tasks, automation of risk assessment, and optimum workforce participation are critical for an efficient and still contextually relevant automated process.
Cost Effectiveness
Costs are an important factor in the viability of SME loans. Ability to service loans through alternate online self-service portals is becoming a key element in the success of a lender’s strategy.
Risk Management and Compliance
In case of SME loans, the SME norms and processes are systematically documented and offer a way to maximize repeatability. However, lenders have to look for ways to counterbalance defaulter risks against revenue objectives. A holistic portfolio management, covenant monitoring and collateral management are critical in order to achieve a good business performance in this competitive and fast changing environment.
New-age Lending for Small Businesses: Considerations for an Ideal Solution
Today, staying ahead means more than just offering loans—it’s about building relationships, being responsive, and doing it all quickly. That’s where a SME lending software comes in. With the right digital tools, lenders can streamline their processes, connect with borrowers on a deeper level, and adapt to the ever-changing demands of the market.
The need for a modern SME lending software is undeniable. As small businesses continue to drive economic growth, financial institutions must equip themselves with tools that can keep up. A robust SME loan software provides the flexibility, efficiency, and scalability necessary to meet the diverse needs of borrowers while also enhancing the lender’s operational capabilities.
When selecting an ideal SME lending software/platform, several crucial considerations come into play.
Unified Platform v/s Siloed Applications
A unified platform integrates various functionalities and data across departments, ensuring seamless communication and process flow. In contrast, siloed applications operate independently, potentially leading to disjointed customer experiences and operational inefficiencies. For SME loan software to effectively serve the needs of both lenders and borrowers, breaking down silos and fostering
cross-functional collaboration is essential.
Lending Lifecycle Management v/s Transactional SLAs
A robust SME lending platform offers comprehensive tools for managing the entire lending process, from application submission to loan disbursal and beyond. However, lenders must also balance process efficiency with transactional service level agreements (SLAs), ensuring timely response and service delivery to borrowers. By prioritizing both lending lifecycle management and transactional SLAs, SME loan software can streamline operations while meeting the demands of small business borrowers.
Touchpoint v/s Contact
As digital channels reshape the banking landscape, the distinction between touchpoints and traditional contact methods becomes more relevant in SME lending. While face-to-face interactions with loan officers have traditionally been a hallmark of customer engagement, digital touchpoints offer new avenues for connection and communication. A modern SME lending platform leverages digital touchpoints to establish continuity of contact across channels, enhancing the borrower experience without relying solely on physical interactions.
Contextual Engagement v/s Transactions
Every interaction with a borrower presents an opportunity to deepen the relationship and enhance the lifetime value of the customer. An ideal SME lending software/platform ensures context in customer interactions, leveraging data and insights to personalize communication and service delivery. By understanding the unique needs and preferences of each borrower, SME loan software can foster meaningful engagements that extend beyond mere transactions, laying the foundation for long-term loyalty and satisfaction.
Omnichannel Experience v/s Mobility & Social
In the age of digital banking, the concept of an omnichannel experience transcends mere mobility and social connectivity. A SME lending platform, integrated with new-age technologies, seamlessly combines digital channels, including mobile apps and social media, to deliver a cohesive and personalized borrower experience. Rather than viewing mobility and social connectivity as standalone features, and ideal SME lending software integrates these capabilities into a unified ecosystem that enhances reach, engagement, and efficiency. By embracing an omnichannel approach, SME loan software empowers lenders to meet borrowers where they are, delivering tailored solutions and support across a variety of channels.
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