Rules of exchange have been available since the first peoples began to ascribe value to things and to barter and trade, so it’s no surprise that the financial services industry is steeped in tradition. But today, the world is changing exponentially and it’s not always easy for traditional institutions to keep up. New ways of creating value are emerging, and both business owners and investors are looking for ways to access funds and to make a return on investment.
New developments in FinTech, AI, and machine learning are rapidly transforming the landscape of how people manage their money. Whether this new technology is a help or a hindrance depends on the institution. This article will delve into some of the challenges traditional banks face with lending and how loan brokers can help commercial loan seekers navigate this ever-changing financial landscape.
SME, Minority, and Women-Owned Businesses
Women and minority-owned businesses are the fastest-growing types of business in the country. Recent statistics from the U.S. Census Bureau say that entirely women-owned businesses account for around 20% of the national total. The same report shows about 18% of the total are minority-owned businesses. Small to Medium Enterprises (SMEs), by far outnumber large corporations at 32.5 million.
So, why does funding for these businesses come mainly from friends and family, not banks? Most banks cite a lack of credit history and low credit scores as the problem. There’s also the question of lender bias. While lender bias is hard to measure, many people believe that not all lenders are entirely fair when it comes to financing women and minorities.
It stands to reason that a company just starting out won’t have a long credit history or decades in business to support them. So, it’s up to lenders to change their criteria for SMEs. Smart lenders are switching to a profit projection-based model that takes into account the business’s cash flow, DSCR, and profit ratios. Incorporating AI and machine learning technology also have the potential for reducing or eliminating lender bias.
A knowledgeable broker knows which lenders are keeping up with the times. They can point minority and women-owned SMEs to lenders that are either minority or women-owned themselves or have a reputation for treating these businesses fairly. A good broker also knows which lenders in their network use forward-thinking criteria instead of outdated underwriting methods.
A term that’s becoming more and more relevant as financial technologies incorporate into our everyday lives is “open banking.” Open banking is the use of financial information by a third party to provide integrated services. It allows consumers, financial institutions, and service providers instant access to consumer information.
Companies that use open banking are more nimble and have access to updated information that banks often don’t. Recent information is critical if lenders wish to take pandemic changes into account when evaluating businesses. This information transfer is not, however, always to the benefit of the borrower.
While more information can help a lender decide whether to approve a loan or not, it can hurt potential borrowers. Instead of just the information on a credit report or application, lenders can see any information digitally available. For example, a lender can see that an applicant recently joined a motorcycle club and decide that the business owner engages in risky behavior. This information can influence the lender’s decision on how reliable the borrower is likely to be.
Loan brokers, by comparison, put their emphasis on the borrower’s business plan. Like equity funds, brokers are interested in future revenue potential. Using current cash flow, performance, and industry predictors, a broker can identify the best funding opportunities for any individual small business.
Financial Technology (a.k.a. FinTech) firms are giving traditional banking models a run for their money. But FinTech is a broad topic, ranging from banking apps to cryptocurrency. Like any other tool, it can hurt or help society, depending on how it’s used. Smart banks utilize it to streamline operations, reach new customers, and optimize efficiency.
FinTech companies use open banking, AI, and machine learning to cut operational costs and provide faster services. This can put banks on the defensive, giving slower, more regulated lenders stiff competition. With the rise of online lenders, brick-and-mortar bank branches aren’t always necessary. So, they can cut down on overhead costs that traditional banks can’t. Machine learning enables lenders to better evaluate risk. But there are negative issues with FinTech too.
Growth within the industry often outpaces security infrastructure, making it a challenge to stay ahead of hackers. The demand for tech engineers is high and competition to offer the best salaries can accelerate overhead costs. Regulations in the cyber-sphere are notoriously uneven, meaning staying compliant is often difficult. Online lenders typically lack personalized services an in-person lender can provide.
Brokers can leverage the lending power of private, traditional, and online lenders while simultaneously offering borrowers the customized experience they crave. Instead of trying to get financial advice from a chatbot, borrowers can get their questions answered right away by a broker who knows their local market. A loan broker can take into account an individual business’s needs and tailor their offerings to meet them.
The Customer Experience
No business owner wants to be treated like a product on an assembly line. They want a tailored experience, not an off-the-rack one. But traditional banks have to weigh the risk to clients who bank their money with them. They can’t overly advise borrowers, so providing feedback and insight is a challenge that tends to frustrate borrowers. Banks also want to promote their own products and won’t tout the benefits of their competitors.
Loan brokers work with multiple lenders and focus on satisfying the customer, no matter which lender comes out on top. This feature gives the borrower access to a wider variety of financial solutions as well as professional financial advice. Insight and consulting can’t come from a depersonalized application process. Brokers increase borrower satisfaction and provide a better experience while tapping into lenders across the spectrum.