2018 Small Business Lending Outlook
During the Great Recession and the credit crunch that followed, banks were desperate to reduce risk and small business lending found itself on the chopping block. The years that followed were a dark period for small businesses, which were hit disproportionately hard by the economic downturn. According to the Federal Reserve, small businesses lost 11 percent of their workforce between 2007 and 2009, vs. larger companies that only lost around 7 percent. A decade later, things are looking up. Between new technology and innovation in the fintech space, the Federal Reserve interest rate hike, improving credit scores and a new emphasis on relationship building, small businesses are likely to see their best post-recession year in 2018. Still, there are barriers baked into the outdated framework of the small business lending industry that inhibit both lenders and borrowers in this space. Will these barriers get more attention in the New Year? Will banks continue to grow their small business loan portfolios?
Here are my predictions for small business lending in 2018:
Trend 1: Banks will continue to increase small business lending
Banks have traditionally been the largest provider of small business loans, but after the Great Recession they pumped the breaks on this segment. As a result, unregulated alternative lenders filled the gap. The term “alternative lender” barely existed before 2008, but now, ten years later, they receive 22% of small business loan applications. With fintech partnerships and fresh innovation in this space making the process of issuing small loans faster and more affordable (not to mention the increasing interest rate adding to the profit margin), banks are more interested in aggressively pursuing this segment.
There aren’t a lot of other reasons a business would pick an alternative lender over a bank or credit union, other than being able to provide funding quickly, which is certainly important to many. Banks are regulated and backed by the government, have better rates and more transparent terms. What is more, with banks continuing to pour money into financial technology, some can even provide funding as fast as an alternative lender. This means banks will be able to dominate small business lending in 2018 while alternative lenders will likely struggle.
Trend 2: Growth of equity crowdfunding
People share their cars with Uber and Lyft, their homes with Airbnb, and now they’re sharing their money with crowdfunding platforms like Kickstarter, Indiegogo, and Gofundme. These platforms allow a person or business to raise a large amount of money through many small contributions made by anyone who supports the idea, cause or business being proposed, often as a donation or in return for the final product. While crowdfunding isn’t a new concept, it got a boost last year when Title III of The Jumpstart Our Business Startups Act (JOBS Act) was implemented, paving the way for equity crowdfunding. With equity crowdfunding, the investor actually receives shares of the company, yielding more long-term benefits. According to Statista, total US transaction value in the “crowdfunding” segment will amount to around $959m in 2017 with an expected annual growth rate of 9.1%. This addition to the “shared economy” trend is particularly popular for those who can’t access credit through traditional avenues or who don’t want to, perhaps because of mistrust toward financial institutions after the Great Recession.
Trend 3: A more inclusive lending environment
Fintech innovation is not only making the financial system faster and more efficient, it’s also making it more inclusive by removing many of the barriers that previously prevented certain populations from participating. The main reason a person who would like to start or grow a small business is unable to do so is because they can’t afford to fund it, either by themselves or through a third party. New technology has made small business lending more efficient and affordable, helping to increase access to funding. Physical barriers and business hours are also being removed as more lenders are leveraging digital platforms to complete loan applications online. This means there will be more opportunities for marginalized groups to become business owners and contribute to the economy by creating jobs, goods, and services.
Trend 4: The legislative barriers to efficient small business lending begin to fall
There are a number of outdated and inefficient laws that prohibit lenders and borrowers from making further progress in improving the small business lending environment. While some of these guide rails were set up with good intentions, small banks in particular feel handcuffed to rules and regulations that create a lengthier, more difficult process for borrowers and lead them to consider alternate sources of lending that may offer a faster experience but mask predatory lending practices. For example, there are many opportunities for the IRS and the U.S. Small Business Administration (SBA) to automate and streamline certain processes, which would reduce paperwork and the waiting period that currently burdens lenders and borrowers alike. These inefficiencies are steadily getting the attention of lawmakers, and the industry is expected to continue the pressure for change in 2018.
Trend 5: A greater focus on experience & relationship building
Consumers are saturated with offers and communications that seem sterile and anonymous. Services are increasingly being commoditized, and consumers now expect an exceptional experience. This means successful companies will find a way to automate the things their customers find cumbersome and unenjoyable (forms, paperwork, etc.), and invest more in those aspects of the business that build relationships and create happiness. In the past, most banks had a long and cumbersome loan application process that put a large burden on the borrower. Borrowers expected an arduous application process and a long, stressful wait to find out if they would be approved or rejected for a loan. We’ve seen more banks automating the application process, pulling data from existing sources, dynamic applications, and other investments to make it a faster and more efficient process, and I expect the pace of adoption for these kinds of solutions to speed up considerably in 2018.
The new year will almost certainly be a time of progress and growth for small businesses. Barriers to lending are falling and the space is becoming a more inclusive environment. For lenders, it will likely be a year where we see a divide – those who can keep up with the pace of change and those who can’t. Borrowers have more options now and no longer have to accept the old ways and traditional processes. They will seek lenders who can provide them a modern banking relationship.
About Trevor Dryer
Trevor Dryer is the co-founder and CEO of Mirador, a financial technology platform enabling banks and other lenders to boost small business lending and reduce the financing gap. Prior to Mirador, Trevor led mobile payments and small business point-of-sale product lines for Intuit and contributed to their online banking solution for mid-sized financial institutions.
Mirador is the leading market provider of small business lending platforms. As an integrated technology partner, Mirador offers hands on, guided implementation, ongoing strategic support, industry expertise and innovative technology solutions that enable more profitable and enjoyable lending relationships for both borrowers and lenders from application through funding. In addition, Mirador leverages predictive machine learning algorithms to better assess risk and deliver rapid robust credit evaluations for more profitable loans.
Trevor is a graduate of Harvard University and received his JD from Stanford Law School.