How to enter the commercial lending space (11 high-growth business lending sectors)

Before we get into the neat and grit of commercial lending automation, let’s size up the business opportunity we’re talking about. 

• International B2B lending market, according to a World Bank report, the world’s micro, small, and medium-size enterprises have unmet finance needs of approximately $5.2 trillion a year. 
• SME loan sizes for a large bank average $564k, for a small bank – $185k and for an alternative B2B lender -$80k. 

Looks like a market ripe for an innovative lender to take their share, right?  

It is.  

But at the same time, large, non-local banks are responsible for 89.5% of loans under $100k given to small businesses and an even larger proportion of bigger loans. 

This disproportion business lending giants leads to statistics like these: 

• About 30% of business finance applications are declined because of insufficient credit history data. Keep in mind that often legacy global scoring approaches don’t apply well to niche SME. 
• According to SBA Attorneys, only 20% of businesses qualified for the financing they requested and 48% got any financing at all.  
• According to the Small Business Lending Index,the loan approval rates range from 13% for big banks to 24% for alternative lenders. 

Where local or niche businesses could’ve been financed by specialty lenders or local creditors understanding their needs better, they went to a bank. And most often got declined. 

The unserviced part of the market remains huge. It used to make sense, because legacy commercial lending automation used to be boutique and therefore expensive that only a mammoth financial institution could afford to maintain it.  

But it doesn’t anymore. 

Even though this status quo was held for a while, the B2B lending technology market has changed dramatically. Making it possible for a wide range of alternative and specialty lenders to automate every part of their commercial lending process in-house achieving lower credit risks, lower margins and operational costs, and therefore, better terms for their business borrowers. 

Before we continue, we wanted to check if you (or your staff) would like this white paper that describes how to automate all parts of the commercial lending process. 

Automate-every-part-of-commercial-lending-process

What kind of commercial lenders are there? 

We’ll go into more detail as we delve into the topic of commercial credit automation, but on a high level, commercial lenders can be categorized this way.  

• Specialized commercial lenders – these lenders focus on specific business financing types like equipment leasing or invoice financing. They offer tailored solutions and often show more flexibility than banks. 
• Alternative B2B lenders – they provide non-traditional financing like peer-to-peer lending and crowdfunding, targeting businesses that may not qualify for traditional loans. Higher risk, perhaps, but with the right scoring, decisioning, and overhead – can be a goldmine. 
• Community banks and credit unions – traditional institutions offering commercial lending products such as term loans, lines of credit, and real estate financing. They cater to businesses with established credit and history, typically requiring collateral and stringent lending criteria. 

Commercial lending verticals with the highest growth potential 

It only makes sense to enter a commercial lending space in the industry you know better than most. But within this space, there is a wide range of credit products and approaches your organization can take when extending B2B loans to your customers.  

We closely monitor the global lending trends in the markets we focus on. And in the recent years, we have seen the most significant growth in the following commercial lending verticals in North America, Europe and Southeast Asia: 

1. Direct B2B lending –  a lender provides lump sum loans to businesses, with repayment over a specific period, used for various purposes like expansion or equipment purchase. 
2. Invoice financing/accounts receivable financing – It’s a short-term borrowing where businesses sell their outstanding invoices for immediate cash, improving cash flow and enabling growth. 
3. Equipment financing – It’s a specific loan or lease agreement for businesses to acquire equipment, allowing them to avoid large upfront costs. 
4. Merchant cash advance – It offers businesses a lump sum payment in exchange for a percentage of future credit card sales, suitable for businesses with irregular cash flows. 
5. Business line of credit – It’s a revolving loan providing businesses with access to funds up to a limit, offering flexibility for managing cash flow and financing opportunities. 
6. Business capital – It includes a range of funding options providing capital for growth and expansion, such as equity investments, venture capital, or mezzanine financing. 
7. Employee salaries/payroll financing – It’s a short-term loan that helps businesses cover employee wages during cash flow constraints, ensuring on-time payment. 
8. Digital refinancing – It involves replacing an existing loan with a new one, often with better terms or lower interest rates, improving cash flow and debt management. 
9. Asset-based credit – It uses a company’s assets as collateral for a loan, popular among businesses with valuable assets and strong growth potential. 
10. Inventory finance – It’s a type of asset-based lending using a company’s inventory as collateral, helping businesses meet customer demand and take advantage of bulk purchasing discounts. 
11. Trade finance – It facilitates international trade by providing funding and risk mitigation, including instruments like letters of credit, export credit, and insurance. 

What can you finance as a small business lender? 

And while these are the businesses that come to us most often right now, this doesn’t mean that other B2B verticals are less well-positioned for rapid growth. So the key for a commercial lender is to find your niche, craft the best offering you can on one or several of these items, depending on your small business customers’ current needs. 

• Startup costs 
• Working capital  
• Inventory financing 
• Purchasing equipment and machinery  
• Hiring staff 

With a modern commercial lending platform like TurnKey Commercial, pivoting and adjusting to market changes quickly won’t be a problem. 

9 Things SMEs Look for in a Commercial Lender

1. Flexibility of plans – A huge chunk of lending operations targets the same market segments within the SME niche. And the thing is that different small to mid-size businesses need different things. They may be looking for SBA loans, bad credit loans, secured loans, unsecured loans, long-term business loans, and whatever else you can think of.

As a lender, you want to offer a variety of products to your clients to make sure as few as possible get lost in the conversion pipeline. In addition, these products need to work pretty much on autopilot, without extensive human involvement.

What you want to do here is to put together a list of credit products you are willing and capable of providing. Then you do thorough competitor research. You need to take apart your rivals from the business, marketing, sales, and growth perspectives.

Make sure to also take into account your local regulators who won’t stay idle as you conquer the market. This means that from the get go you need to build your product lineup with a compliance blueprint in mind. We go into more details on how to take care of that here.

Developing and launching a new credit product takes time and effort. And in today’s day and age you also have to offer all those products digitally. So in addition to thinking through all the details and workflows, you need to take care of making your business digital. And if you have to create the software infrastructure for each new product from scratch, delivering a product suite to help every one of your potential borrowers gets really hard. That’s where TurnKey Lender’s all-in-one lending software comes into play. The platform comes with a list of major credit products built-in and is flexible enough to meet the specific needs of your business.

Feel free to check out the comparisons of TurnKey Lender automation to its closest competitors, nCino and Cloudlending.

2. Fair interests based on advanced evaluation techniques

In the end, what matters to a borrower is the interest you’ll charge them. This one also is quite a pickle. As a new business you need to hurry to make a profit: you have paychecks to cover and utilities to pay. But should your interest be one-tenth of a percent higher than that of the competitor, you run a high risk of losing the lead.

So how does one offer better interest rates than the market average:

• Smaller operational costs: you can’t pay your employees less than the competitor because the market will take them away from you. So the only valid way to achieve the reduction of operational expenses is to automate everything that doesn’t require human creativity and analysis. You’d be surprised to learn what percentage of lending operation’s workload that is. For example, AI-powered lending automation by TurnKey Lender improves operational efficiency on average by 275%. Considering the fact that we’re talking about bi-weekly or monthly expenses here, I don’t have to tell you how big of a deal that is.
• Loans issued at lower risks: now, risks are harder. The lending game is all about the risks you’re willing to take as a loan issuer and the borrower trying to convince you they are reliable and can be trusted with a lower rate. TurnKey Lender has got you covered here. Namely, the part of our system that is responsible for loan origination and decisioning. We put together a credit decisioning engine that is powered by deep neural networks that learn about the types of clients each lender has and adjust over time to approve more of the safe loans faster, based on the behavior of your previous clients. Your competitors will most probably be solely relying on the client’s credit scores they get from a credit bureau. TurnKey Lender went an extra mile to help you deal with risks. Our software takes into account traditional and alternative data sources and analysis approaches and runs them through our proprietary machine learning algorithms. There can be no risk-free loans. Just as there will never be risk-free insurance. That’s the whole point of the two industries. TurnKey Lender reduces risks to a minimum, helping you weed out the vast majority of unreliable borrowers and letting you make informed decisions of who to fund and what interest to charge considering the business’ risk score. You’ll see that quickly that will be the sole most important metric you rely on in your credit decisioning.

3. Easy application

Technology makes people more impatient by the day. Users who’re used to getting what they need in minutes won’t tolerate a lender that makes them go through a tedious application process. Consider making the first contact with your business easy. Don’t force the user who’s just researching your offering to go through a 20-step application form. You just need to get the basic details from them and once they are on your hook you’ll be able to get everything else.

The application form within the TurnKey Lender platform is fully customizable. So you can collect exactly the borrower data you need at any point.

4. Narrow specialization

Observing the market for as long as we have, you start to see tendencies. And one thing is very clear. The businesses that try to please everyone at the same time from the very beginning, very rarely pull it off. So it’s extremely important to understand the niche you serve. Focus on the market segment you know. For example, in the beginning, you may be offering just supply chain financing to some specific merchants. But once you tailor the process to their needs, they will pay you back in spades bringing you new business and staying loyal. And once you’re an established authority in one niche, you can branch out into more capitalizing on the name you have earned.

5. The speed of the approval process

SME lending is way more complex than, for example, personal loans because you don’t just have to analyze one person, their eligibility and truthfulness. You have to figure out if you believe in the business in question. You need to analyze their cash flow, expenses, and growth plans to decide if they will be able to return the money. But at the same time, businesses aren’t as complex as people. If we’re not looking into personal motives, basically you’re dealing with a set of metrics – ones and zeroes. And there’s nothing artificial intelligence does better.

It can take a bank or an alternative lender up to 10 business days to make a credit decision and disburse funds. For an SME in need of a loan, this delay may prove deadly and lead to an irreparable gap in the cash flow. That’s just one of the many reasons why the lender that is able to make the right crediting decisions quickly – wins.

A perfect example of booming growth due to a simple onboarding, quick loan approvement, and customer focus is Kabbage. The company can approve loans smaller than $250k in minutes. And if you have the industry-leading decisioning algorithms that help you reduce interest for your clients, you’re already far ahead of the majority of your competitors.

With TurnKey Lender’s automation and AI-driven decisioning, complete loan origination can be as fast as 30 seconds. Now compare that to 10 business days.

6. Intuitive interfaces

I can’t tell you how many times I looked for something online, landed on an unintuitive website, tried to figure it out for about five seconds, and closed the tab. Then I would go to a different resource that may have had an inferior product but took the time to create an experience that I could enjoy. Many old-school bankers and baby-boomers may shrug off the importance of the system design. But modern lenders should always assume that there’s a competing website opened in the very next tab of the browser.

That’s another area where TurnKey Lender really shines. Your platform comes with meticulously designed cabinets both for your employees and for the borrowers. The workflows and user experience for all the users have been designed and continually improved over the years, taking into account both general design best practices and the peculiarities of the lending industry.

7. A minimal amount of interactions

A ton of steps before getting access to funds is today’s equivalent of having queues in your bank’s branches. You don’t want borrowers to be sick of you before they ever get access to money. Of course, lending is one of those niches where you can’t be too cautious about who you work with. But luckily software like TurnKey Lender helps you streamline this process and make a safe credit decision with minimum strain on your clients.

8. Branding with a human face

This one has to do with marketing and is more of a psychological thing. Depending on the funnel you have, potential borrowers can have dozens of interactions with your brand before they convert into a customer. They may read your blog, sign up for your newsletter or see your ads before they even have the need in a loan. But when they do, it’s perfect if your brand name lights up somewhere in their mind and pushes them to convert into a customer.

In today’s web, you need to make sure your brand isn’t one of those faceless corporate entities. It may be hard but you got to find the balance between being genuinely helpful, personal, and professional. The thin line between being a reliable business partner and having a real human face. A quality rebranding and marketing/content strategy may be an extremely expensive and lengthy undertaking. But you can start by analyzing your direct and indirect competitors. It’s always easier to see a speck in someone’s eye. Look for what you’d change and what would make their brand more appealing and memorable.

With that in mind, we’ve made TurnKey Lender as user-friendly as it gets. Not to mention, the system is completely white-label, letting you fully brand it and give it your business’ look and feel while keeping the intuitiveness achieved by our business analysts, engineers, and designers

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9. The importance of transparency

This one is really simple. Users hate being tricked. So if you have to charge them an origination fee, let them know upfront, don’t try to hide it. Because even if one out of ten customers figures out there’s something shady going on, it may cost you business. You run a business, it’s clear and normal that you need it to run at a profit. It’s better to be honest about your monetization where possible and relevant. With the right approach, this may even be turned into another thing going for your brand.

Cutting costs and minimizing risks with commercial credit automation 

To carve out your own piece of the commercial lending space, you’ll need to serve your existing or emerging industry better than the competitors.  

Large institutions relying on legacy solutions find it very challenging to develop suitable lending solutions for their SME customers while maintaining viable associated service costs.  

This allows smaller lenders to use lending tech and take up their new roles in the B2B finance lifecycle. Some do b2b loan origination and underwriting while partnering with banks for loan management. Others handle all aspects of commercial lending themselves.  

There are two main approaches, and we’ll go over them in more detail in chapter II. But on a high-level, it’s: 

1. Newcomer commercial lenders build custom solutions consisting of several integrated tools. For example, TurnKey Lender Origination module and Decision Engine integrated into your existing banking system. 
2. Others go for an end-to-end system like end-to-end TurnKey Commercial platform to eliminate any need for data or automation fragmentation. 

Conclusion 

Automation unlocks a window of opportunity for commercial lenders including community banks & credit unions, specialized commercial lenders and alternative B2B lenders.  

Modern lending automation solutions allow you to set up automated credit scoring and decision-making based on the data you choose which allows to lower the credit risk and improve ROI  

With the average interest rate for a small business loan lying between 2.54% – 7.01%, commercial lenders who are agile and informed enough to offer better credit terms while cutting costs, stand to benefit immensely.  

Read this next

This is a part of a 3-chapter series with all you need to know to automate any kind of commercial lending process. You can continue with this course here:

• All you need to know before you automate your commercial lending process
• Part III: B2B credit automation that cuts operational costs and minimizes credit risk
• White paper: How to automate every part of the commercial lending process