In recent years, online lenders have made strides toward solving a problem for growing US businesses: they put speed, flexibility, and opportunity on the table for small and medium-sized enterprises (SMEs) that once struggled to get loans.
80 percent of SMEs use external funding, and the majority want to borrow no more than $250,000. This makes them ideal candidates for alternative lending solutions – like from the US-based business funding fintech Credibly – particularly if bank financing isn’t an option.
Online lenders are not only more likely to take chances on growing businesses. They also dramatically reduce wait times for loans, offering flexibility to businesses that need to increase their cash flow as soon as possible. Especially when the process is fully digitized, it can significantly improve the funding speed via virtual wallets and by offering a choice of payment methods to the customer base. Added features like mobile wallet provisioning and access to mobile apps allow customers to manage funds seamlessly, as well as choose where and how to spend their working capital.
So as online lenders proliferate, what can these players do to stand out in a space where relative speed is already the status quo? It comes down to the ways digital payments are driving and shaping the evolution of lending.
New Expectations for Speed
When an SME applies for a loan, it faces two wait times: approval and funding. Many lenders consider their decision speed — approving the loan — as more of a competitive advantage than funding speed. But it’s wrong to assume that once businesses get approved for a loan, they stop being in a hurry.
In fact, SMEs often borrow in order to increase cash flow immediately. This has led to the growth of Merchant Cash Advance (MCA) companies, which help undercapitalized businesses act quickly on challenges and opportunities.
Currently, many online lenders use Automated Clearing House (ACH) or wire transfers to pay out loans. These methods are relatively quick, especially when coupled with the fast decision speed online lenders are known for. Still, ACH transfers can take three to five days to process, while wire transfers take one to two days.
Real-time payments remove funding speed from the equation by delivering funds in seconds. Even businesses that can afford to wait a few days for their funds are likely to see the attraction of instant payments, especially as speed becomes the norm in other payment scenarios.
Instant gratification may be especially important as members of younger generations move into decision-maker roles. Millennial small business owners were twice as likely as older peers to use alternative lending. And, they primarily did so for reasons of speed and convenience — not because they were offered a better interest rate.
Growing consumer trends have also led to heightened expectations for funding speed. Consider point-of-sale (POS) financing, a particularly flexible breed of lending that lets consumers qualify for payment plans right at the sales terminal. Usually financed by a third party, POS financing makes buying that new laptop or designer handbag more manageable for shoppers. And since these microloans happen on the spot, consumers can act quickly to secure their must-have items. This kind of thinking has changed the way businesses approach their own, larger-scale cash flow shortages.
But speed is only part of the picture, and online lenders must consider other means of increasing customers’ lifetime value. That means understanding who their borrowers are, and how they use loans to advance their goals.
When funds are issued via digital or physical cards, payment processors unlock a treasure trove of data about the borrowers’ spending. This data enables lenders to enhance their risk management models by analyzing borrower behavior. For instance, when borrowers apply for a loan claiming to need it for one reason but end up spending the funds on something else, lenders gain insights about their customers’ real needs, challenges, and the risks they present.
Rich data collected by payment processors can help lenders determine whether and how much to lend, as well as what loan terms to set. (Consider the success of mobile-only lenders, who use hundreds of data points from applicants’ mobile phones in order to make underwriting decisions.)
Data also helps lenders refine their marketing models and identify new opportunities. For instance, a lender noticing high borrower spend at restaurant supply stores could potentially partner with those establishments to offer POS financing. And, demographic information highlights niche or growing markets where borrowers can double down on their outreach.
Transitioning from Cost Center to Profit Center
The long-term benefits of data are promising, but by switching to digital payouts, lenders reap immediate gains, too.
It all starts with issuing. ACH or wire transfers typically cost over $1 per payment — an operational cost lenders once had no choice but to absorb. When they switch to virtual cards, that cost is not only eliminated, but lenders gain the opportunity to share revenue with their payment processor on interchange fees generated from card use.
In other words, when a borrower uses a lender’s branded card to buy goods or equipment from a supplier, that supplier must give the payment processor a percentage of the purchase. Payment processors typically share this revenue with the lender they’ve co-branded with. That allows lenders to flip the equation from paying for loan issuance to profiting from every transaction.
Conclusion: The switch to digital makes lending future-proof
Ultimately, staying competitive means recognizing that innovation is not just a matter of problem-solving for today, but looking ahead to digitally powered opportunities like speed, data, and new sources of revenue. This shift should come naturally for online lenders, who already know the value of digital disruption in the SME lending space.