Forty-four percent of firms with low credit risk experienced a financing gap, compared to 71% of medium credit risk firms and 90% of firms with high credit risk. Firms most frequently attributed these shortfalls to insufficient credit histories and insufficient collateral.Problems in accessing financing are stalling start-ups and shelving SMB growth plans for some companies. This sector is significantly underserved by the funders, and SMB capital investment is also much higher than it is for their larger peers. SMBs don’t have easy access to banking channels, and even with more small-business-oriented credit unions and community banks in the U.S. banking system, the coverage is inadequate.While the financing landscape for SMBs has been improving, the funding gap is still significant. The Federal Reserve Banks’ 2017 Small Business Credit Survey estimated that 46% of the companies received the full amount requested in 2017, compared to 40% in 2016.
The average SMB needs a loan or lease for a far smaller amount than $250,000. And that’s where another kind of gap – the technology gap at financing companies – becomes a problem.Nearly 60% of small businesses seeking financing are applying for transactions under $100,000, the Harvard Business School paper authors wrote in a follow-up article. Transaction costs associated with making a $100,000 loan are nearly the same as those for a $1 million loan, so some banks naturally favor applicants seeking higher loan amounts. “In addition to improving the experience for business owners, digitization has the potential to substantially reduce the cost of lending at every stage of the process, making SME customers more profitable for lenders, and creating opportunities to serve a broader swath of SMEs. This is important because transaction costs in SME lending can be formidable….,” the authors wrote. Other thought leaders including Accion Venture Lab have also urged funders to leverage technologies to reduce overhead in serving SMBs. So where does the equipment leasing and finance industry fall into the digitization spectrum? Most lessors and lease management systems lag behind other financial services such as B2C and B2B loan and asset management providers in their adoption of digital capabilities, according to a global benchmark study by The Alta Group that was recently covered in the Monitor. Less than 5% of lessors, for example, are using electronic identity, e-signature, and e-documents, though more than half are planning to implement these technologies. Most current digitization efforts in the industry are focused on customer-facing processes.
“There is clearly a strong emphasis on investing in the front office and especially the customer relationship and experience while nearly half the organizations surveyed are in the process of digitalizing their sales and marketing functions. Digitalization was also being widely applied to streamline business processes and support process re-engineering, though for most this was still a work in progress,” the study summary noted.So, we have a duck-on-water situation in equipment leasing. On the surface, a leasing company can demonstrate efficient automation and e-commerce in its dealings with customers, but underneath it may be scrambling. Processes still handled manually in some companies that can easily be streamlined using available technologies include credit approval, identity verification, fraud checks, documentation generation and signatures. Here’s one example of labor-intensive processes ripe for automation: the manual review of every credit application to ensure data provided by the customer are accurate. Using available technology, lessors can automatically convert the data provided by customers into a credit application (no manual entry), submit it automatically for identity verification (no manual verification), automate address validation (eliminate invalid addresses), automate credit pull and scoring (minimize manual credit review to exceptions only), automate document generation (no manual docs) and send documents for e-signatures (eliminates receiving back physical signed documents). Automating these processes alone can reduce the overall time for processing a credit application from days or weeks, to minutes. Today’s technology tools can increase the efficiency of processing the transactions for SMB customers so that doing business with them is more lucrative for funders. They also can expand options for usage-based billing, making financing more affordable for smaller businesses and at the same time improving a lessor’s competitiveness.
“Technological change appears to be advancing so rapidly that simply staying in place and adhering to traditional models may no longer be a feasible business strategy for some firms,” the ELFA State of the Equipment Finance Industry report observed. “Increasingly, equipment finance providers that adopt these technologies are likely to gain an edge over those that don’t.”
Small business owners are leading this economy and expressing optimism rivaling the highest levels in history, said NFIB President and CEO Juanita Duggan.
Expansion continues to be a priority for small businesses who show no signs of slowing as they anticipate more sales and better business conditions.