The recent pandemic forced consumers to accept a new way of shopping, small businesses a new way of reaching consumers, and community banks a new way of lending. So when the CARES Act prompted thousands of small businesses to frantically apply for Paycheck Protection Program (PPP) funding, many community banks quickly realized their old ways of processing loan applications would not cut it.
But fintech lending platforms came to the rescue. These lending platforms unleashed innovative solutions helping banks issue a record number of government-backed (through the Small Business Administration) loans in just a matter of months as the PPP unfolded.
However, banks also took a hit. Writing in Banking Exchange, Praveen Sharma, the head of BFS solutions for North America at Virtusa, says, “Banks and financial institutions lent trillions of dollars as part of PPP while experiencing record low levels of interest rates.” This has, continues Sharma, “impacted [their] overall profitability which is forcing banks to reinvent businesses with new offerings and capabilities to ensure their success in a post-pandemic world.”
So now, post-PPP, bankers are looking to continue this momentum, but more profitably. They’re focusing on future small business lending initiatives, helping small businesses and the banks better navigate the popular SBA 7(a) and 504 loan programs.
Lessons from the PPP for SBA Lenders
The PPP emergency small business loan program provided much-needed financing options to struggling small business borrowers hoping to keep their doors open and employees working. Between March 2020 and March 2021, the Small Business Administration (SBA) approved over 11 million loans, with an average loan size of $67,647. Some businesses even received a first and second round of financing; however, it took a while quite a learning curve to get financing institutions up to speed when accelerating the approval process while operating within the limits of the SBA guidelines.
Knowing time was of the essence, community banks found solutions in fintech lending platforms like Biz2X to meet the immediate need for faster processing. Fintech solutions provided purpose-built platforms using the newest cloud architecture and included a key integration to the SBA E-Tran system. Fortunately, the platforms took as little as one week to launch. As a result, financial institutions were now equipped with an easy and unified way to digitally process loans, calculate, and obtain the required information, while simultaneously supplying loan officers real-time updates to support anxious clients through a new lending program. The digital solutions not only got much-needed funding into the accounts of small business clients quicker, but they also helped banks solidify client relationships for the long term.
The Future of SBA Lending is Digital
Fintech lending platforms leveled the playing field between community banks and large banks with the resources to spend huge sums on tech during the pandemic. Now that CARES Act relief funding has expired, community banks will need to take the next step to secure the ability to provide SBA lending in a similarly smooth and digital manner.
SBA lending before the pandemic was complex and confusing for banks and small business owners. SBA loan programs each have their eligibility guidelines, loan underwriting, servicing, maximum lending amounts, and more. Banks must adhere to strict guidelines, which adds more pressure to service clients hoping to get SBA loan approval.
The Biz2X Accelerate SBA lending platform offers a complete end-to-end digital lending platform to handle most SBA-guaranteed loan programs. Community banks already familiar with the digital lending platform will have no problem pivoting to the SBA lending platform.
In case you’re not familiar with how it works, automated loan decisioning allows lenders who continue to use manual approval procedures to step up to digitalization and streamline their processes. Gone are the slow decision times and internal management roadblocks. SBA lending, in particular, needs the consistency and auditability automated loan decisioning can offer. Here are the four steps employed to make it happen.
Step 1. Analyze Customer-Provided Data
Customers use an online application process, therefore eliminating the banks’ need for manual data entry. Traditional paper form applications require hours of unnecessary record-keeping tasks such as annually reviewing documents and correcting human errors. Automated loan origination enables small business owners to upload all the necessary documentation without stepping foot into a bank. The platform then checks for missing information and miscalculations, finally notifying customers to update information.
Step 2. Analyze Third-Party Data Technology Partners
Next, using the access information provided by the customer, loan decisions software can extract relevant data from third parties such as bank records, annual tax returns, identity verification, credit scores, and other industry information. Collecting digital data also ensures lenders capture the most current available information.
Step 3. Automatically Analyze Behavioral Data
Loan decisions can also be vetted using behavioral data secured by applicants’ online activity, including social media, online purchases, and more. Lenders can then analyze for financial responsibility and the business’s reputation in the market. Banks can also determine if the business owner might benefit from other lending opportunities.
Step 4. Run AI-based Decision Engine With Lender-Defined Rules
All the information gathered is next fed and analyzed so immediate loan decisions can be made. Not that the entire decision is tech-based. Automated loan origination should only give the data-based points, so then lenders can set their personalized parameters. Lenders can also customize the platform to direct clients receiving loan denials suggestions on looking for funding next. If clients are provisionally approved, the loan application moves to the underwriting stage for further review of collateral and financial ratios. The SBA lending platform can then calculate risk based on the community banks’ criteria, adjust the loan terms, or kick up to a supervisor for further review.
Benefits of Automated Loan Origination
The benefits of automated loan origination for community banks have the power to erase the frantic memories of the early pandemic and PPP chaos. The accuracy of a Biz2X SBA lending platform means eliminating human error at all stages of the application process. Loan officers no longer have to follow up with customers for missing information as the system immediately lets the applicant know where data is missing. Also, automated lending solutions provide consistency in sticking to underwriting policies. Unintentional biases are eliminated, although allowing for manual review when necessary. Once information is digitally collected, the platform syncs seamlessly with the lenders’ digital record-keeping systems, providing a permanent digital record for compliance and future data review. Finally, the efficiency an automated lending platform offers means applications can be handled quicker, so lenders can increase the number of customers serviced without causing employee overload.
Community bankers who used digital lending for PPP loans have already put their banks in the best position for lasting growth and achievement after the pandemic. Employing a digital lending platform improves the customer experience, ensures positive referrals bringing in new potential customers, and keeps community banks ahead of the lending process pack.
Next Steps for Community Banks and SBA Lending
It’s a good thing community banks are better poised to serve small businesses since these companies need help post COVID. This time writing in Finextra, Sharma says that even though the PPP loans were “vital” to small businesses, “many still require assistance if they are to stay viable.” This, he says, offers a “significant opportunity for banks” to help—and that help starts with making loans.
Whether those loans are SBA-backed ones or not, Sharma says banks “need to implement a rigorous process that allows [them to] better judge which businesses will be able to repay their loans.”
It makes a lot of sense for the community banks that updated their technology to work with the SBA on PPP loans, broaden their lending options and include the SBA’s other loan offerings, such as the traditional 7(a ) loans, microloans, 504 loans, SBAExpress, and Export Express. Not only will these loan choices help lenders retain clients that got their PPP loans through them, but they could also bring in new businesses interested in exploring all the lending options the bank has to offer.
There’s a lot of room to grow here. Prior to the pandemic, about 1,700 lenders typically participated in the SBA 7(a) loan program every year, while roughly 5,500 financial institutions participated in the PPP. It may pay for these lenders to keep working with the SBA.
Historically community banks have struggled with the complexity and time-consuming nature of the SBA lending process. But, when they need to borrow money, small business owners need it quickly and with the least amount of hassle. So, to expand their offerings and customer base, community banks must use whatever methods available to meet the needs of small businesses in the most efficient manner possible. SBA automated lending can help make that happen.
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