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4 Things Today’s Small Business Owners Expect From Their Lenders
Competition is the seed of innovation. Nowhere is that principle more obvious than in the business finance industry.
Before online lenders came onto the scene in the mid-2000s, a small business owner looking for a loan had one option: a traditional bank. Everything had to be handled in person, at a branch, where approvals could take weeks. Then, entrepreneurs’ loan applications were often declined with little or no explanation given.
To this day, traditional banks struggle with those shortcomings. A Federal Reserve survey of business leaders dissatisfied with their lending experience found lack of transparency to be the top reason for their dissatisfaction. Long wait times and a challenging application process ranked a close second and third in the study.
Business borrowers have never liked those parts of the lending experience, but applicants put up with them because they had few alternatives. Now that they do, they’ve come to expect a better experience.
What Small Business Borrowers Want
Small businesses don’t expect the world from their lenders. They’re looking for four frankly reasonable things:
1. An online, mobile-friendly approval process
When a business owner asks a traditional bank for a $50,000 loan, the bank goes through the same process as it would for a $5 million loan. Because the processes and costs for manual underwriting are the same regardless of the loan amount, banks are less willing to make business loans below $1 million.
The trouble is, few small businesses are looking for that much money: The average small business loan amount provided in 2018 by small national or regional banks was $146,000, with alternative lenders’ typical loans ranging between $50,000 and $80,000.
To streamline small business-sized loans, automated lending platform Kabbage became the first to allow entrepreneurs to apply, be approved for, and access funding through a mobile app. Giving small businesses an ongoing line of credit and on-the-go access to manage cash flow makes for a more convenient, stickier user experience. Sure enough, Kabbage posted a 68 percent increase in the amount of capital accessed on mobile devices from 2017 to Q3 2018, and its focus on the customer experience has earned it one of the largest customer bases in its industry, boasting more than 180,000.
2. Transparent cost structures
Traditional banks are notorious for the fees they charge small business loan customers: Origination fees, service fees, prepayment fees, referral fees, packaging fees, Small Business Administration guarantee fees, and documentation fees are only the most common ones that business borrowers pay. Over the lifetime of a loan, those fees can add tens of thousands of dollars to its on-paper cost.
At the urging of business borrowers, the Innovative Lending Platform Association has developed a tool to make loan fees more transparent and consistent across lenders. In conjunction with the Association for Enterprise Opportunity, the consortium of alternative lenders created what it calls the SMART — Straight Forward Metrics Around Rate and Total Cost — Box to share the true cost of a loan. The ILPA’s SMART Box includes metrics like annualized percentage rate, total cost of capital, and average monthly payments. The result is a clearer picture of the true out-of-pocket costs business owners can expect to pay.
3. Global access to capital
Despite what the word “small” might imply, small business owners are no longer only serving customers in their own country. Ebay determined in 2016 that more than 95 percent, or more than 200,000, of its small business users use the e-commerce platform to export their products. For comparison, just 30,000 of Ebay’s small business users did so in 2009.
Because, thanks to the internet, small business sellers are increasingly doing business across international borders, they need cross-country access to capital as well. If a small business owner is purchasing supplies from a Mexican vendor, for instance, it’s unlikely they’ll find a branch of their regional bank nearby. They can, however, tap their line of credit through a mobile app or other card-based payment method. A recent example is Alibaba’s new Pay Later program, which allows U.S. businesses buying materials on Alibaba.com to finance purchases at the point of sale.
4. Stellar customer service
What’s the primary reason borrowers choose one bank over another? It’s not location, loan size, or even loan terms; it’s customer service. When bank comparison firm Credio polled more than 3,000 people about why they use one bank over another, it found that consumers want to use one bank for a variety of needs on their schedule
Things got interesting, though, when Credio asked the people it polled about the factors of customer service they were satisfied with. Customer support interactions came in second, cited as a source of satisfaction by 29 percent of those surveyed, to mobile and online tools, at 31 percent. Despite the frequency with which lenders promote their “personal touch,” up-to-date technology seems to be more important to borrowers.
What small business borrowers expect from their lenders are the same things any of us look for in a financial partner. Mobile and online tools, transparency, always-on access to funds, and great service shouldn’t be special asks. If they are, financiers should expect some fresh competition.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes.