SME Borrowers – Optimal Target Audience for Alternative Lenders

Blog Post Financing Automation & AI

A new breed of entrepreneur has created an untapped niche for digital lenders. These upstarts left their corporate positions to start lucrative new business ventures from a shared workspace or a home office. They’re an interesting mix of people with one thing in common – a bright entrepreneurial spirit. It’s all good news for alternative lenders, because you’re their first choice for business funding.  

Last year we published an article called, SME Borrowers: Perfect Match for Alternative Lenders. That article discussed business borrowers as an emerging opportunity for alternative lenders. Today we’re revisiting the topic with up-to-date information on the size of the opportunity. Along with an in-depth analysis of the prospect audience, and some non-traditional marketing techniques to capture their attention.  

The gig economy is the new corporate career path

The workplace has changed. It wasn’t so long ago that the typical career path was a straight climb up the corporate ladder at a single company. Younger employees sometimes got caught referring to these managers and directors as lifers. Today the corporate lifer has gone the way of the dinosaur. The only worker who intends to stay with one company over the long-term is the worker who launched the company in the first place. 

SMEs don’t fit the standard mold

These business mavericks are an interesting niche, both demographically and psychographically.

Demographically, we see a male / female ratio that’s an almost equal split, and an age range that extends from 25 to 85+. 

Psychographically, we see a variety of backgrounds leading to a similar current mindset:

  • Younger prospects who used a corporate position as an apprenticeship in order to learn the business from the ground up. 
  • Prospects in their mid to late-50s who got laid off by an organization that leveraged payroll as a short-term technique for reducing expenses and increasing profitability. 
  • Retirees with too much expertise and too much energy to feel satisfied spending their day on the golf course.  

Many of these people had been playing around with a creative new business idea for a long time. When they recovered from the shock of losing a long-term position, or got bored with a not so interesting hobby, they sat down and translated their concept into a go-to-market plan for a lucrative new venture.  

This fundamental shift has created a new generation of entrepreneurs. They’re an ageless tribe. They are happy to be out from under their old corporate constraints. And they’re eager to embrace new approaches. Alternative funding options are at the top of their list.

Let’s size the opportunity

There are two major reasons why SME borrowers continue to be a strong niche for alternative lenders: 

Demand for business loans remains high

Market demand for SME loans is at an all-time high, and for all the right reasons. 44% of small businesses and 47% of mid-size companies that apply for additional funds intend to use the money to support growth initiatives. They’re scaling their business with new clients and larger orders. And they’re acquiring smaller specialized companies to expand their capabilities, without the time and expense required to build the functionality from scratch. 

One of the biggest concerns for today’s business executive is the fact that limited capital could stifle their growth opportunities. They don’t have the time, or the patience, to contend with an onerous application process at a traditional bank. They do have the financial expertise to conduct a cost/benefit analysis that quantifies the value of incremental growth, compared to the cost of capital. And they appreciate the ease and speed of an online application process that includes a 24-hour credit decision plus same-day funds availability.    

Traditional lenders decline 73% of business loans   

Big banks and traditional lenders decline business loan applications at an astonishing rate. Last year we reported that only 26.0% of small business loans were approved in the first half of 2018. According to a lender survey published by Biz2Credit, this number is relatively unchanged at 27.5% in 2019. Big banks are touting the fact that they approved a record number of small business loans this year. 

It’s a shocking point of pride for a group that continues to decline three out of four loan applications. 

Traditional banks seem to be stuck in an outdated mode of operation. Their online user experience tends to be little more than a digital version of an old, legacy process. Only 20% offer instant credit decisions. And 70% still require borrowers to come into a branch to provide identification, original documents, and live signatures. 

Most credit unions are lobbying for permission to approve more business loans, because a big part of their mission is to support the local business community. Unfortunately, their lending potential is often limited due to caps on their loan volume that are dictated by federal regulatory agency rules.  

Alternative lenders, on the other hand, approve 56% of their business loan applications. That’s more than double, and it’s a good reason for SME borrowers to bypass traditional lenders. Alternative funders embrace a customer-centric mindset, and they use specialized FinTech lending software to deliver a fast, easy borrower experience. 

It starts with a streamlined application, and ends with substantially more approved accounts, thanks to sophisticated algorithms that analyze each borrower using traditional and non-traditional criteria. In addition, the interest rates and fees have become far more competitive with banks, because they pass along savings generated from lower operating costs and lower charge-offs.  

Projected alternative lending potential in 2020 

Statista has an optimistic outlook for alternative lenders over the next 5 years. 

Their projected numbers for SME deals funded by alternative lenders in 2019 were as follows:

  • 63.9 million loans (9.6% YOY growth rate) 
  • $243.1 billion transaction value (23.0% YOY growth). 

It’s interesting to see that the transaction value is growing at a much faster pace than the number of loans. Historically, alternative lenders have catered to smaller businesses with loan amounts ranging from $5,000 to $200,000+. The Statista numbers indicate that the prospect base for alternative lenders is shifting towards larger enterprises in addition to SMEs.   

Let’s go prospecting for business borrowers

It’s important to think in terms of psychographics, because demographically, it’s tough to force this group of highly independent individuals into a single pigeon hole. SMEs are the proverbial melting pot. A bubbling cauldron where every sex, every age, every ethnic group, and every type of business venture is represented. 

Searching for SMEs  

This group may look very different, but you’ll find tremendous commonality once you scratch the surface. These are creative thinkers. Their box of crayons has a lot of colors, and they like to draw outside of the lines. Their out-of-the-box approach is often their most precious resource, but time is close behind in the second position.  

They don’t love technology just for the sake of technology, but they love the way technology can save them time and money. It’s a means to an end, so they make it a priority to be tech-savvy. Their business and personal lives are often intertwined, so they can look and feel more like a personal borrower than a business borrower. 

Keep in mind that our prospect’s primary job is not looking for money. That’s just the gas that keeps the engine running. Their primary job is driving their business forward, while navigating their way through an obstacle course. 

There’s a 1-2-3 formula when it comes to winning in the SME marketplace: 

  1. Get them the funding they need to scale their business. 
  2. Make the process fast and easy to save them time and energy. 
  3. Stay on top of your competitors’ interest rates and fees to make sure your pricing is competitive. 

Talking to SMEs

There are two important aspects to consider when developing your marketing plan: 

  • media placement for brand awareness 
  • key benefits messages that address pain points.

You’ll want to work with a media expert to identify the places where your prospects hang out. The media strategy will likely include a mixture of traditional and digital outlets where branded product advertising is placed on broadcast programs, online and print publications, and Internet blogs. The advertising messages should include three components:

  • talk to the prospect’s pain points
  • offer an easy resolution that positions your product as their best choice
  • include a call-to-action that links to a short-form, online application.  

New lenders may want to consider an influencer marketing campaign as one component of the overall marketing plan. This is a great strategy when you are still building your brand awareness, because it leverages an endorsement from a name your prospects already know and trust.    

SMEs will use Internet technology to shop around and submit multiple applications. However, many will become loyal, high-value customers to their first lender. That’s why it’s important to create a brand experience that gains their trust, and to nurture a long-term relationship after you approve their first loan.

Resolving their specific pain points

SMEs share many of the same pain points. So the first step is to identify those hot buttons. Try standing in their shoes for a little while. It should be an easy task for most alternative lenders, because so many of you are SMEs yourselves. This is your tribe.   

Entrepreneurs have dreams. Unfortunately, they don’t typically have all the money they need to bring the product to market on a fast-track timeline. This business venture is a serious enterprise. It’s rarely a hobby. Some SMEs started small, and scaled up over time, but their focus was always firmly fixed on bottom line profitability. In fact, many launched their business with an eye toward building a niche brand in order to sell it to a bigger corporation within a few short years. 

SME owners, both male and female, often have a family that relies on their success. Profits generated from their enterprise pay the monthly mortgage, fund the children’s education accounts, and support elderly parents with a variety of health concerns.  

When you look at this group from a psychographic perspective, it’s clear to see that their two primary pain points are time and money. Therefore, the best way to support this group is to provide efficiencies and working capital. 

This is great news for alternative funders. You’re well positioned to become their lender of choice, just by doing what you already do best. Delivering a digital origination and account management system, a quick credit review, and a high rate of approval. It’s part of your DNA.  

What does it take to launch an SME lending operation?

SME prospects are smart, creative, tech-savvy business people who are busy scaling an already successful business venture. Alternative lenders who win in this arena will use FinTech software with automated origination and account management processes, advanced credit decision software, and cybersecurity features. 

Your technology stack will be grounded with a flexible platform that supports online applications, instant credit decisions, digital funding, and digital payments processing. The origination and account management functionality must be integrated across desktop and mobile devices, so that customers can switch devices mid-way through completing an application or mid-way through making a payment. This type of automation delivers an exceptional user experience for the borrower, plus processing efficiencies and profitable credit decisions for the lender. 

In addition, regulatory agencies are publishing new compliance rules at a rapid pace as the industry evolves. It’s important to stay out in front of these changes to keep your operation running smoothly.      

LaaS platforms deliver automation and decision software

It can be challenging to approve the right accounts, at the right price point, in real-time. Traditional bankers, who cut corners with a digital version of a legacy system, will miss the mark with today’s borrowers. That’s why top funders use cutting edge technology with specialized lending software to solve a myriad of origination and account management challenges. 

There are a number of good LaaS platforms that provide FinTech software systems to alternative lenders. These platforms deliver automation and advanced credit scoring that minimizes processing time without compromising risk tolerance, accuracy, or security. Regardless of whether the system is reviewing a new application, managing payments, or using predictive bad debt triggers to monitor client credit scores. 

Look for a cloud-based system that’s fully managed, easy to deploy, and easy for your team to master. It should be a rules-based system that can be customized to meet individual requirements, and it should be regulatory compliant out-of-the-box. Software upgrades should be automatic at a platform level with no additional programming on your part, including compliance updates as new rules are published. The platform should include a proprietary scoring model that uses data analysis and machine learning to constantly fine-tune the scorecard. And it should include alternative scoring models that can evaluate prospective businesses with little or no information at traditional credit reporting agencies.   

Look for an enterprise developer that’s forward-thinking in order to stay ahead of tomorrow’s business borrower. We believe they’ll be looking for instant gratification, just like today’s personal borrower. The platform should offer omni-channel availability by default, where applicants can start and save an application on one device and seamlessly re-start and complete it on another. And the platform should be working toward an application-free experience, where approved customers enjoy instant access to additional funds every time they open their mobile banking app. 

Next steps

One of the most effective and cost-efficient ways to support SME borrowers is to leverage the TurnKey Lender LaaS platform with advanced credit scoring software. Our fully managed, cloud-based lending platform automates origination and account management processes. It uses data analysis and machine learning to qualify more accounts, more quickly. And it is regulatory compliant out-of-the-box, customized for local market rules.    

If your alternative lending operation is gearing up to target SME borrowers, then it’s time to request a TurnKey Lender Free Trial.

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