Getting a business loan today isn’t the same as getting a business loan a decade ago, or even a year ago. That’s because the business lending industry is constantly evolving. Thanks to new trends, better technologies, and in some cases, new laws and regulations, banks are forced to remain flexible and adaptable – and in many cases, borrowers and banks equally benefit.
So how exactly is business lending evolving? And how does this affect you?
How Business Lending Is Evolving
These are some of the most important ways that business lending is changing.
1. Inclusive lending. One major breakthrough in the industry has been inclusive lending, the practice of making lending available to a wider range of demographics and businesses. Historically, bank loans have been disproportionately available to certain demographics and certain types of businesses, but modern banks want to broaden their horizons.
Providing more inclusive funding is beneficial for both banks and the businesses doing the borrowing – and it’s even beneficial to the economy overall. With minorities, women, and other underserved groups getting more access to funding, we can reduce economic disparities and create more opportunities for more people.
Accelerating the development of entrepreneurship and new businesses has awesome consequences for local economies. And of course, the banks doing the lending stand to make more money as a result as well. Accordingly, financial institutions are practicing more dedicated outreach to make funding available to historically marginalized groups.
2. Diverse fundraising options. If you can’t find a standard business loan, what do you do? Do you just give up and assume that your business is impossible to start? There’s no excuse to do this in the modern era, since business financing is becoming more available and more diverse. There are more types of business loans available these days and more opportunities to raise money – especially when you consider crowdfunding. If a bank rejects you for a loan, it’s nothing more than a temporary inconvenience, and you can spend your time looking for an alternative way to get the money your business needs.
3. Stricter standards. In some ways, requirements to get a loan have increased. Before lending, banks typically want to see a business credit score in place (along with a personal credit score of at least 700). They may also require you to be an operation for a specific period of time, which may require you to hit other financial thresholds. There are many reasons why this is the case, including a reaction to previously lax (and borderline irresponsible) lending standards. And while it may be an inconvenience for some business owners, it reduces the chances of taking out a loan that can’t be repaid.
4. Streamlined applications and underwriting. Of course, despite the increased specificity and complexity of the loan application process in some regards, applications have been extremely streamlined – as has the underwriting process for financial institutions. Thanks to a combination of smoother workflows and automated technology, users have a much easier experience applying for loans and banks have a much faster process for turning them around.
5. Higher documentation requirements. If you’ve applied for a business loan recently, you’ve probably noticed that there are higher documentation requirements. In pursuit of responsible lending, lenders are seeking more evidence before approving you for a loan. You’ll probably be required to provide financial statements and dozens of other documents before you get approval.
6. Innovative new technology. Countless new technologies are emerging in the banking industry, including artificial intelligence (AI), big data analytics, and blockchain-based exchanges. The fintech industry has become truly disruptive, and these impressive developments have trickled their way down to the business loan origination process. Expect to see even more developments in this area in the near future.
7. Competitive transparency. When shopping for a business loan, business owners have the luxury of competitive transparency. At a glance, they can review many different types of loans, including interest rates, terms and conditions, and other variables. Accordingly, they can choose more favorable terms and end up with a much better fit for their organization.
8. Micro-businesses and solopreneurs. In the wake of the COVID-19 pandemic, there’s been a wave of more solopreneurship and microbusinesses. In response, banks and lenders have made more products available to serve small and emerging businesses.
What It Means for Business Owners
What does this mean for you?
· Get your paperwork together. If you plan on applying for a loan for your business, make sure you have your paperwork together. You’re going to be responsible for providing ample documentation before you can get approval.
· Build a stronger foundation. Additionally, it pays to have your financial house in order; with a better credit score and a few years of successful operations to prove your value, you’ll be in a much better position to qualify.
· Be ready to shop around. You have many different options for business financing. Take the time to shop around and see what different banks and financial institutions have to offer. And if you don’t qualify for a loan, or if you don’t like these offers, you can always consider a different way to fund your business.
Banks are undergoing radical transformations as we experience some of the most explosive technological growth in history. While it’s unlikely that the industry will become unrecognizable in the next few years, we can definitely count on new innovations making business loans smoother, more accessible, and more sensible for everyone involved.
