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Automating loan decisions for small businesses


It’s no secret that small business loans historically offer small profit; in fact, there is little economic difference in funding a $100,000 loan versus a $1 million loan. However, even though these loans may not always be the biggest movers to a bank’s bottom line, this type of lending is essential to establishing and building lasting relationships with small businesses.

So, how do banks make these small business loans not only a strong relationship-building tool, but also more beneficial to the bottom line without sacrificing quality? The answer lies in process improvement. The common manual method of approving and processing loans takes an inordinate amount of time and manpower, therefore driving up cost and decreasing margins. Not only is the process slow and complex for the lender, but it typically leaves the small business owner confused and frustrated. 

Banks must transform this process and utilize automation during the decision-making stage. Consumers trust banks because they’re proven; their credit policies have stood the test of time and have served thousands of individuals and businesses. If banks automatically run loans against this existing, established lending policy, they can take a risk they understand. And because automation will allow the bank to process more loans more quickly, process time and overhead costs will be reduced, ultimately making the loans more profitable.

Automated decisioning can also lead to more responsible banking overall. Even though a small business owner may not qualify for the initial amount of money for which they’re asking, they may qualify for a lesser amount, which automated software would be able to recognize. This allows the banker to work with the small business owner to gain access to some funds, even if it may not be the total desired amount. Or, the opposite could also hold true. If a small business owner qualifies for more than originally requested, the automated decisioning process could also reveal that information, providing valuable upsell opportunities of which the small business owner or banker may not otherwise be aware.

System Rules

The thought of letting software decide who receives a loan may make some lenders uncomfortable, but there’s a simple solution: only let the system determine the clear-cut cases. By automating the simpler loan decisions against a bank’s credit policy, the bank can free its loan officers to spend their time on larger and more complex loan decisions, the ones that require more critical thinking.

This model also helps the bank with compliance; because the loan is being run by an unquestionably objective system algorithm the bank defines, there is no way for biases to effect the decision or exceptions to unknowingly occur. Furthermore, everything is visibly tracked in the system and tied to the entire loan portfolio, including details such as dates, times and reasoning.

The unprofitability of small business loans at banks has prompted alternative lenders to enter the space. Even though these lenders offer significantly higher interest rates, small businesses have demonstrated they are willing to pay them because these lenders are able to quickly answer the two imperative questions: am I approved and when will I get my money? The rise of these lenders has demonstrated that convenience and speed have the ability to even outweigh cost. Banks must follow suit and give these businesses what they want: faster answers and quicker access to funds.

This can occur as a result of effective digital engagement with the borrower, by combining tools such as automated decisioning and interactive customer portals, whereby documents can be accessed, completed and exchanged securely in a hosted environment from the comfort of the customer’s home or workplace. Such a package offers a powerful, competitive experience that’s hard to top.

The life of a small business owner can be hectic and stressful. These individuals depend on banks to be their trusted partners and advisors, especially when it comes to funding, one of the most important components of the small business equation. If banks can earn the trust of small businesses at the crucial point of funding by streamlining the decisioning process, they can continue to benefit from these relationships for years to come.

Mr. Daniel is executive vice president, enterprise banking, at Wilmington, N.C.-based nCino. He can be reached at [email protected].