The American dream is a beacon of hope for millions of people around the world. The promise of being able to start your own successful business and owning a home with a white picket fence and 3 kids is an alluring one.
In other words, accelerating SMB success only helps drive the US economy and that means SMBs need exposure to the proper financial services to function properly. Unfortunately, the reality is that lenders have to sacrifice lending opportunities to protect themselves, and many SMBs don’t get the financing they need.
However, the lost opportunities may not have to happen as often as you think. With new technology, like automated spreading software, lenders can mitigate their risk of unreliable borrowers while still growing their portfolios.
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SMBs: An Underrated and Underserved Market
Although SMBs generate nearly half the US GDP, it’s still a very underrated and underserved market. In many cases, lenders tend to associate SMBs as riskier investments which only hinders accelerating SMB success.
1. SMBs are viewed as riskier investments.
There are several reasons why SMBs are viewed as riskier investments. One reason is that SMBs often have a more limited financial history than larger businesses, like Amazon or Meta. This makes it challenging for lenders to accurately assess the risk of lending to SMBs.
Additionally, SMBs are more vulnerable to economic downturns. This means, that when the economy weakens, SMBs have a higher probability of defaulting on their loans. This can lead to significant losses for lenders.
SMBs also heavily carry the fact that nearly 40 percent of new businesses fail within three years. Finally, many SMBs are less diversified than larger businesses. This means that a single event, such as a loss of a major customer, can have a significant impact on the SMB’s bottom line.
Ultimately, these reasons can be boiled down to a single culprit — lack of financing opportunities.
2. Lenders may not have the time or resources to properly assess the creditworthiness of SMBs.
Whether interest rates are at all-time lows or peaking at uncomfortable highs, lenders may not have the time or resources to properly assess an SMBs creditworthiness. Some of the major reasons include the following:
- A high SMB-to-lender ratio making impossible to assess the creditworthiness of each applicant
- Varying industries make it challenging to create a general assessment
- Limited financial history
When looking at the SMB-to-lender ratio, it’s clear how overwhelming the number of applications can be. In the past, many lenders assessed SMBs with a blanket assessment. This is because they didn’t have enough resources to dig deep into each applying SMB.
Fortunately, a lack of resources isn’t that big of an issue for lenders. New technology, like FlashSpread’s automated spreading software provides lenders with instant, accurate information on an SMBs creditworthiness.
With new technology, lenders can make better data-driven decisions with confidence.
3. There is a lack of data.
Lack of access to essential data sets can present a challenge for lenders when determining creditworthiness. These data sets would only be derived from manually converted tax returns and financial statements that are prone to error and use extensive resources to complete.
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This is one of the reasons why it used to be challenging to get a holistic view of an SMBs financial situation.
Automated software can help alleviate this barrier by providing instant comprehensive financial reports and a platform where borrowers can quickly upload the required information. This provides lenders with instant access to the data they need to make informed lending decisions.
4. SMB owners may not be aware of all their financing options.
While it’s easy to put the blame on lenders and a lack of resources, the truth is sometimes the SMB market is underserved because many SMB owners aren’t aware of all their financing options.
In fact, many SMBs only pursue one or two financing options when in reality, there are more than a handful of options available to them.
One reason for this may be that some SMB owners are not always familiar with the different types of financing in general. For example, a business owner might only know about traditional bank loans and not be aware of other options, like invoice factoring or asset-based lending.
Another reason SMBs might not be aware of their options is that they’re not sure where they can turn to for help. With millions of SMBs operating in the US, there will be many lacking the correct information when they need it.
Finally, a portion of SMBs may not pursue all their financing options because they’re unsure if they’ll be approved if they’ve gotten denied the first few times. This can lead to businesses turning down potential financing opportunities because they’re worried about the approval process.
For these SMB owners, having an automated and digitized process may be the answer to accelerating SMB success.
Automated Spreading Software to Mitigate SMB Lending Risk
When it comes to lending money to small businesses, one of the biggest issues that lenders face is the risk of default. Due to a lack of resources, many lenders have to rely on gut feelings or outdated methods when it comes to deciding which SMBs to lend to, and this can often lead to bad decisions and missed opportunities.
However, with the help of data-driven software, lenders can mitigate the risk of lending to SMBs. Automated spreading software is just one of many that allow lenders to instantly assess a business’s creditworthiness, so they can make better data-driven decisions.
Ultimately, automated data-driven software is just one piece of the puzzle and is an essential tool for lenders when it comes to assessing risk. By using this software, lenders can feel more confident in their decisions, which leads to accelerating SMB success and fewer defaults.