The number of new business applications have nearly doubled over the last two years. Sales of existing SME opportunities have also grown, increasing 24% in the first quarter of 2022 compared to the previous year. For financial institutions, accelerating growth in the SME sector represents a vital opportunity, as 85% of these businesses consider financing crucial to their continued growth and success.

By financing SMEs, financial institutions are getting in on the ground floor of what could become a long-term profitable relationship. However, achieving growth through SME lending is difficult when the institution is relying on traditional credit decisioning, or outdated models to define a small- to mid-sized business.

Traditionally, banks have used limiting criteria, such as the number of employees or business revenue, to segment SMEs from larger commercial clients. Today, SMEs may no longer fit such rigid definitions. For instance, a world class chef providing catering in rural Stowe, Vermont may have only 5 employees, but bring in $5 million in revenue annually.

Traditionally, banks have used limiting criteria, such as the number of employees or business revenue, to segment SMEs from larger commercial clients. Today, SMEs may no longer fit such rigid definitions. For instance, a world class chef providing catering in rural Stowe, Vermont may have only five employees, but bring in $5 million in revenue annually.

Additionally, many new businesses fail to fit into the confines of traditional credit-decisioning models. 30% of millennials, for example, report owning a small business or side hustle. If you’re straight out of college and ready to capitalize on a brand-new innovation, how do you gain access to funding if you have no business credit history and have never held a personal credit card?

This lack of historic data precludes many financial institutions from lending to new businesses, closing the door on a burgeoning opportunity before it can even begin.

Outdated lending systems are no match for modern credit decisioning

To take part in the growing opportunity for SME lending, institutions should consider alternative methods for evaluating borrower risk, improving credit decision timeframes, speed to cash and optimizing the SMEs access to credit throughout the relationship life-cycle. The challenge for most financial institutions though, is how to connect legacy lending systems with third-party data sources that can enable the next generation of SME credit experience in a timely and cost-effective manner.

Rather than investing in updating legacy systems, an alternative approach being adopted is to launch a ‘speed boat’ initiative to address innovation in the SME segment – standing up a new digital offering connected to a modern API first lending servicing engine. This approach enables the institution not only a speed to market advantage but delivers a platform agile enough to adapt quickly as the needs of the SME customers evolve.

Additionally, the speed boat approach enables financial institutions to address unique markets. For example, a program oriented around a specific profession or industry. Launching services that are specifically designed to meet customers’ unique financial needs versus trying to fit them into a convoluted standard set of general product offerings and digital experiences.

As financial institutions of all sizes take advantage of the growing market in SME lending, data accessibility is the key to approving more loans with less risk, and modern technology is making it possible for more banks to enter this growing and vibrant market.

For more about SME lending, revisit Mambu's recent report, Small businesses, big growth, here.