Some 500,000 – 600,000 new small businesses emerge each year, according to recent U.S. Census Bureau data, and they supply over 60% of jobs. While we’ve expected that number to grow and fuel the economy, it is starting to decrease according to recent reports by TIME and CNN Money.
Is small business growth slowing due to lack of innovation and initiative? That seems unlikely. According to a survey done by Insureon, 82% of small businesses expect to grow in 2017. Whether buying new equipment or furniture, hiring, moving, or adding products/services, businesses are planning to expand.
So what’s really standing in the way?
FICO’s mid-market bank and credit union clients tell us that it remains difficult for entrepreneurs and small business owners to acquire the credit they need to fuel their growth plans. The reasons for this are two-fold.
First, there is often little traditional commercial credit history available on new businesses and little traditional consumer credit history on the principals of those businesses, especially among new immigrants or young entrepreneurs. Lenders perceive that the investment in these ‘thin-file’ applicants is extremely risky, although it often isn’t as dicey as they think when using the analytic tools and data sources available today.
Second, it’s expensive for all lenders to serve these smaller community businesses. Whether loans are issued for one million dollars to a commercial business or ten thousand to a small business, traditional lenders frequently spend the same amount of resources to originate them. This makes it less profitable to take chances on small businesses.
Since lenders don’t yet see a viable solution to this issue, they choose to focus on mid-size and large corporate customers, taking fewer chances on small business customers. It remains a challenge to increase origination efficiency and make lower-dollar small business loans a profitable and scalable venture.
Mid-market banks and credit unions traditionally lend to many small businesses. They often provide a more personalized financing experience, as well as focus on building and maintaining relationships with community businesses.
There is good news for mid-market banks and credit unions. Small business owners value the personalized relationships and community focus that smaller lenders provide. All things being even, small business owners prefer working with these lenders. In fact, 75% of small businesses that are customers of small banks or credit unions are “highly satisfied” with their lending relationship, according to a survey at the Federal Reserve Bank of Cleveland. By contrast, only 51% are “highly satisfied” with large banks, and only 15% with online lenders.
In the same survey, small business customers listed two main problems with their mid-market bank or credit union relationship: a difficult application process and a long wait time for the credit decision. Both can be attributed to manual processes. FICO sees this as the major roadblock for growth in small business lending, and it’s certainly a notable disadvantage compared to the instantaneous decisions provided by larger lenders and online lenders.
For those with manual origination processes and limited automation, the first step is implementing a decision rules management system. This allows small lenders to improve loan volumes with the same resources. The system should include an intuitive user interface that enables business users to author rules and deploy business strategies quickly, without the need for IT coding. Next, they should look to create scores specific to smaller enterprises, often with a mix of personal information from the founders/owners (like the FICO® Small Business Scoring Service℠ solution).
FICO works with mid-market lenders to solve these manual loan processing challenges in a sophisticated way that meets budget and ease-of-use requirements. Our newest product, FICO® Origination Manager Essentials, targets mid-market lenders to help them make quicker, smarter small business lending decisions. To read more about this solution, visit fico.com/fico-origination-manager-essentials.