It’s National Small Business Week, And Entrepreneurs Need to Know This Type of Lender

Access to capital is a key driver of business success.

Whether a business needs to expand to meet rising demand from customers or cover unexpected expenses to keep the doors open, convenient and efficient access to cash flow is crucial. But for small business owners access to capital can be a major challenge.

Traditional bank lenders, who are typically conservative in underwriting loans, may overlook small businesses with thin credit files or lower credit scores. And while online lenders can provide quick access to funds, higher interest rates and repayment terms can cause more financial problems down the road, especially for small business owners using loans to cover repair expenses rather than to invest in expansion.

Community Development Financial Institutions (CDFIs) can offer capital as well as targeted business advisory services for small business owners, which may help these businesses become better candidates for traditional lending in the future. For example, some small business owners may have financed business expenses or investments with a personal credit card. Carrying that type of debt can lead to lower credit scores, making it harder to qualify for more business capital. CDFI advisory services can help untangle personal and business finances and help improve the long-term sustainability of the business.

But many small business owners don’t know CDFIs exist.

And even if these business owners know about CDFIs, the application and underwriting processes these community lenders use can take longer than some business owners are willing or able to wait.

Advances in technology can help connect small business owners with CDFIs and other community lenders, as well as help those CDFIs compete with online lenders to deliver the ease of application and quicker access to funds that today’s business borrowers have come to expect.

My company 2River Consulting Group (2River) has worked with partners at the Association for Enterprise Opportunity to create, an online marketplace that uses data analytics to match small businesses in need of capital with community-based lenders.We’ve also used data analytics and AI to help LiftFund, a Texas-based CDFI. We updated LiftFund’s application and underwriting processes and decision model, improving its processing volume and approval rates.

Here are three ways 2River used technology to help LiftFund’s customers access the capital they need to build or expand their small businesses.

1. Simplify data collection so busy entrepreneurs are more likely to apply.

Small business owners don’t always work traditional hours, so a convenient online experience was important to attract time-strapped entrepreneurs. The first thing we did with LiftFund is update and simplify its application form. We reduced the number of questions on the form by automating data where possible. For example, instead of asking applicants to upload three months of banking statements, we enabled applicants to connect directly to their accounts. Applications rose by 59%.

2. Automate basic decisions so you can get applicants an answer quickly and spend more time on special cases.

With online lenders offering nearly instant decisions on loan applications, CDFIs that want to compete must speed up their decision-making process. Using data analytics, we helped LiftFund implement a scoring system that in some cases allowed for next-day decisions on approval or denial. Not only did this improve the speed of customer service, it also freed up underwriters’ and loan managers’ time to focus on borderline cases and potentially approve more applicants who might be better risks than the scoring system indicates.

3. Create models that look beyond credit scores to get a holistic picture of a small business’ repayment risk.

There are lots of reasons why small business owners might have lower-than-average credit scores. These entrepreneurs might be immigrants who haven’t had time to build a credit file. Or maybe they’ve financed needed business expenses on a personal credit card, limiting available credit.

While many traditional and online lenders put a lot of weight on credit scores in approving business owners, LiftFund’s borrowers have an average credit score under 600. In creating a loan approval decision model for small business owners, it was important to include non-traditional metrics of repayment ability. And it’s working. LiftFund’s repayment rate, always high, improved from 95% to 97% after implementation of this technology.

Bottom line: With more and more options for small business online lending, it’s important that community lenders keep pace with customers’ expectations. By automating data collection and leveraging technology for decision-making, CDFIs can continue to compete for small business customers.

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