Small business lending has seen a dramatic shift from traditional commercial bank loans to the rise of fintech and online lending, which offer more streamlined and inclusive solutions for small business owners.

Alternative lending models that utilize financial technology, such as real-time data and artificial intelligence (AI), are quickly replacing conventional business loans with faster and more flexible lending solutions.

To remain relevant, banks must adapt their strategies and leverage emerging technologies to cater to today’s small business owners. In this article, we’ll explore the current business loan market and discuss why banks should prepare now to sustain their businesses. We’ll also discuss the future trends in small business financing for banks and the challenges and opportunities that await.

The Current Small Business Lending Landscape

According to a Biz2X and BCG whitepaper, half of small businesses seeking funding don’t get all the capital needed. This funding gap on an international scale is estimated to exceed $5 trillion. Meanwhile, small businesses in the U.S. comprise 40% of the gross domestic product (GDP), valued at $29 trillion. 

Despite economic challenges and ongoing tariff conflicts, as of March 2025, 452,255 applications for starting a new business in the U.S. were filed, a 6.4% increase from the previous month. Considering the funding needs for these startups and the ongoing need for financing with existing businesses, small business lending in 2025 presents ample growth opportunities for lenders.

At the same time, banks should be mindful that small business owners are frustrated with slow approvals, high rejections, and limited funding options from traditional financial institutions. As a result, 40% of small businesses have considered alternative financing. Meanwhile, two-thirds of small business owners feel that their bank is lacking on the digital front.

The Critical Need for Banks to Overhaul Their Processes in Small Business Lending

The structured process of traditional business loans influences the time it takes for a bank to approve or deny a loan. According to an FDIC survey, customer service and lending speed are the two most important factors for small business loan borrowers. The two are interwoven for many borrowers, and a speedy approval process enhances the customer experience. 

Small business financing has long been the backbone for banks and traditional lenders. As the momentum towards alternative financing accelerates, banks must dispense with obsolete processes and systems and modernize to keep pace with emerging small business lending practices. 

Doing so can be a revenue driver for banks while increasing access to funding for small business owners. It can also ensure sustainable growth for banks that pivot forward to take advantage of the opportunity to tap into the unmet demands of small business owners.  

How Digitalization Can Help Banks Prepare for Small Business Lending

Digitalization can position banks toward success in the evolving digital lending landscape. The business world has pivoted towards digitalization, with 23% of small businesses applying for loans online. 

With banks tightening their lending standards and small business owners citing the need for faster funding, the number is projected to increase. Also, with recent changes allowing Fintechs to issue SBA loans, more small business owners are expected to apply for loans online because of the enhanced convenience.

Digitalization in small business lending offers several advantages.

  • Enhances efficiency of the loan process: Digital technology offers the following benefits:
    • Reduces the costs and time of loan underwriting
    • Streamlines and automates financial processes through AI-driven solutions
    • Facilitates real-time credit assessments
    • Ensures regulatory compliance
  • Better decision-making through advanced data analytics: Digital solutions leverage machine learning and big data to gain more insight into the financial health of a business. 

With state-of-the-art data analytics, banks and financial institutions can:

  • Make more informed decisions about applicants applying for small business loans.
  • Project future revenue trends and cash flows to calculate the financial risk of loaning money to borrowers.
  • Monitor real-time financial metrics to gauge the accurate financial status of a borrower.
  • Deliver more tailored loan products.
  • Increases access to small business financing: Digital lending solutions overcome the restrictive and time-consuming requirements of traditional lending. Digitalization allows banks to leverage alternative data sources to assess creditworthiness. This data comes from:
    • Transactional histories
    • Social media activity
    • Online borrower reputation sources, such as reviews 

This process makes small business financing more accessible for borrowers who otherwise might not have qualified for a small business loan through traditional means.

What Three Things Can Banks Do to Prepare?

1. Embrace Digital Lending Solutions

Implementing several digital lending solutions can streamline the loan process through automated tasks and reduce turnaround times for loan approval. SBA lending and loan approval software are vital to meet the evolving needs of small business owners. Whether to drive efficiency or improve SBA application workflows, digitalization can meet those needs while ensuring data accuracy and compliance. 

2. Focus on Enhancing the Customer Experience

The modern business loan consumer values hyper-personalization and prioritizes building business relationships. Banks should focus on each client’s individual needs to offer tailored loan products. Automated lending solutions play an important role in modernizing small business lending. Automation also frees up essential time for banks to build rapport and foster customer relationships. These elements enhance the customer experience, increasing customer satisfaction and loyalty.

3. Collaborate With Fintech Partners

Partnering with an online lending platform provides banks with innovative solutions and technologies. More importantly, they bring the knowledge to leverage their power. Collaborations also allow banks to stay ahead of cutting-edge services and technological advancements to better serve their clients. 

For example, Oceans First Bank needed better capabilities to handle its high-volume application intake. The bank partnered with Biz2x to deploy its next-generation decision-making engine to automate loan applications and drive efficiency. The collaboration culminated in 250 more applications processed, with an average loan amount of $195,000 approved through Biz2X.

The Takeaway

As digitalization and technological advancements drive the small business financing landscape, banks must overhaul their lending processes, adopt digital solutions, and focus on customer-centric strategies. Doing so can help traditional financial institutions remain competitive, enhance operational efficiencies, and ensure sustainable growth and success in a rapidly evolving financing ecosystem.

For more insights into the future of small business lending, explore the Biz2X/BCG whitepaper, which delves deeper into the role of technology and innovation in modern lending practices.

FAQs

What are some future trends in small business lending for banks?

Two of the biggest trends expected in small business lending are AI automation and embedded finance, which offer financial products such as loans on a non-financial platform. Banks that leverage these trends are poised for success.

How will banks survive as a business in the future?

Leveraging AI, data, and customer-centric policies will drive bank revenue in the future. Banks that adopt these strategies and embark on innovative partnerships will most likely succeed.

Are banks already adopting AI lending solutions for small business financing?

Yes, according to McKinsey, banks wanting to set themselves apart from their competition are utilizing AI to:

  • Elevate the customer experience
  • Enhance efficiency
  • Boost revenue and profitability
  • Optimize resources and workflows
  • Help with investment and financial planning
  • Facilitate small business lending and other banking processes

What will happen to banks that don’t adapt their small business lending strategies and processes?

Unfortunately, banks that don’t conform to future trends in small business financing will likely get left behind and limit their growth potential.

Is it necessary for banks to partner with Fintech providers to modernize processes for their business loans?

Banks can implement new trends and processes without partnering with third-party providers. However, to do so, they’ll have to hire an entire in-house team of IT professionals, software developers, marketers, security specialists, and more. The advantage of a provider like Biz2X is that the platform partners with the top financial providers and has a proven, built-in system that is ready to go.