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 2021. For financial institutions, accelerating growth in the SME sector represents a vital opportunity, as 85 percent 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achieving growth through SME lending is difficult when the institution is relying on traditional credit decisioning, or outdated models to define a small- to mid-sized business.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 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. Thirty percent 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Outdated lending systems are no match for modern credit decisioning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, such as invisible credit. By utilizing unconventional data, such as a business owner’s payment history with a telecommunications company, financial institutions can accurately define borrower risk and support the growth of thriving business opportunities.
The question for most financial institutions is how to access new sources of data when current systems and technologies have been geared toward an increasingly outdated model of decisioning. For most, the answer is transformation, utilizing APIs to gain access to a broader scope of data and insights.
To envision APIs, think of a connection interface that rests between banking systems and plug-in digital capabilities. APIs make it possible for financial institutions to connect with third-party data sources, such as utility companies, to gain bill payment history.
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.