While the country enjoys unprecedented levels of small business optimism, access to credit will either boost or curtail economic growth within this high-impact sector, according to a new study. Gimme Credit: Faster, Simpler, Safer Credit for Main Street America, explores factors contributing to small businesses access to credit, and proposes lending best practices that will boost economic output of these companies.
The study is a joint effort from PayNet, the leading provider of small business credit data and analysis, and Raddon, a provider of innovative research, insightful analysis and strategic guidance to financial institutions.
The Good News: Small Business Confidence Surges
Small businesses are on an upward trajectory, according to the study:
- Anticipated small business loan demand is at its highest level since 2012, with 48 percent planning to take out a loan in the next 12 months
- Nearly two-thirds of small businesses (65 percent) anticipate an increase in sales, compared to just 5 percent that expect a decrease
- Small business economic confidence ratings outpace those of consumers by more than two times (43 percent vs. 21 percent)
Small businesses are in full-on growth mode, said PayNet President William Phelan. Theyre looking to banking partners for reasonable capital infusions, but are discouraged by slow reviews, impersonal processes and denials. This creates a huge opportunity for nimble community banks, credit unions, and alternative lenders to fill the void.
The Downside: A Small Business Credit Gap is Slowing Economic Recovery
According to a Harvard study, following the 2008 financial crisis, a combination of regulatory and risk factors lowered credit volume among larger financial institutions, hampering the pace of recovery. The lingering effects of these factors continue to hamper small business growth today.
Its a recurring cycle, said Bill Handel, chief economist, Raddon. Cumbersome underwriting practices increase the likelihood that lenders are either unwilling or unable to extend favorable terms to small businesses, which in turn discourages applications. Fortunately, lenders can take steps to improve their efficiency and profitability in this area. If localized or niche lenders are able to foster improvements in their local markets, it will in turn fuel the broader economy.
The study outlines three specific steps lenders of all sizes can take to improve automation, achieve faster decision-making and reduce the lending cost curve:
1. Segment applications by loan request size and reviews by loan risk profile
2. Deploy technology to assist in preparing applications, collecting data, and analyzing the business/loan
3. Optimize procedures by leveraging industry intelligence to improve their decision engines
The report notes that lenders employing these best practices stand to gain market share as the economy expands. In particular, new, technology-based lenders have made strides to reach this underserved market, although they may struggle with higher marketing costs and weak local connections. This trend bears watching for mainline financial institutions in particular, as barriers to create a propensity for small businesses to look to alternative lenders.
An executive summary of the report is available at Raddon.com, as well as the Gimme Credit: Faster, Simpler, Safer Credit for Main Street America study.
PayNet, Inc., is the leading provider of credit ratings on small businesses enabling lenders to manage credit risk, grow earning assets and operate credit at lower cost. PayNet maintains the largest proprietary database of small business loans, leases and lines of credit encompassing over 24 million contracts worth over $1.6 Trillion. Using state-of-the-art analytics, PayNet converts raw data into real-time market intelligence and predictive information that subscribing lenders use to make informed small business financial decisions and improve their business strategy. For more information visit www.paynet.com.
Raddon, a Fiserv company, has been providing financial institutions with research-based solutions since 1983. Raddon works exclusively with financial institutions and has a unique understanding of the industry, resulting in the ability to apply practical know-how to the challenges and opportunities financial institutions face. Raddon combines best practices in research and analysis with consulting and technology solutions to help institutions achieve sustainable growth and improve financial performance.
Fiserv, Inc. (NASDAQ: FISV) enables clients worldwide to create and deliver financial services experiences in step with the way people live and work today. For more than 30 years, Fiserv has been a trusted leader in financial services technology, helping clients achieve best-in-class results by driving quality and innovation in payments, processing services, risk and compliance, customer and channel management, and insights and optimization. Fiserv is a member of the FORTUNE 500 and has been named among the FORTUNE Magazine World’s Most Admired Companies for five consecutive years, recognized for strength of business model and innovation leadership. Visit fiserv.com and follow on social media for more information and the latest company news.