U.S. one-hundred dollar bills are seen in this photo illustration at a bank in Seoul

Traditional lenders face competition from faster upstarts

U.S. one-hundred dollar bills are seen in this photo illustration at a bank in Seoul
U.S. one-hundred dollar bills are seen in this photo illustration at a bank in Seoul

While most sectors are increasing their loan approval rates for small businesses, some are still approving at much higher rates than others, new data from Biz2Credit reveals.

The data was generated from the platform’s regular survey of more than 1,000 small business owners who applied for a loan with Biz2Credit.

Big banks approved 21.7 percent of April loan requests, their 12th increase in the last 13 months. The approval rate jumps to 43  percent at credit unions, and 49.6 percent at small banks.

Both alternative lenders, defined as merchant cash advance companies, factors and others, and institutional lenders clocked in at 61.1 percent, but they are headed in different directions. The alternate lender approval rate has dropped every month since the survey began in January 2014 while the institutional approval rate has gained in each month.

Biz2Credit CEO Rohit Arora founded the platform with his brother Ramit in 2008.

“Our goal was to create an online, intelligent platform for small and midsize businesses that had no in-house CFO,” Mr. Arora said.

As a business moves through its life cycle, it will need different products  at different times, Mr. Arora said. Startups need to grow and borrow to purchase equipment and real estate, for example.

In bigger companies, the responsibility for product selection and timing sits with the CFO, but smaller companies often do not have someone with the proper expertise to navigate the available options, Mr. Arora explained.

Biz2Credit fills that role once a company becomes involved with their platform. They assimilate underwriting data into their algorithms and essentially play matchmaker between the company and available products in the marketplace.

Mr. Arora said transparency has played a key role in Biz2Credit’s growth, which averages between 15,000 and 20,000 new customers each month. The platform does not sell leads to any company.

They also share significant data in an effort to demystify the underwriting process, Mr. Arora explained.

Rohit Arora“Traditional lenders approve or reject but do not give reasons for their decision,” Mr. Arora said.

“Every customer should get insight into their credit worthiness so they can see what they can do to improve it.”

Mr. Arora said the recently concluded harsh winter should not penalize borrowers, but it will anyway, because of the arbitrary approach most traditional lenders use when assessing creditworthiness. Low revenue totals must mean higher risk, so out comes the “REJECTED” stamp.

“In that instance the business will come back and the borrower shouldn’t be penalized for factors beyond their control.”

In their virtual CFO role, Biz2Credit helps companies determine how to improve their chances of obtaining credit so they have a better chance of obtaining better terms the next time they need one, Mr. Arora added.

The fact loan approval rates are on the rise is a sure sign of improving economic health, Mr. Arora said. It means lenders are more optimistic about a company’s ability to generate enough revenue in the current climate to pay off the balance.

There is plenty of other supportive data, he said. Micro level numbers from individual companies show solid year-over-year growth. Many companies have trimmed more frivolous expenses while adding technological efficiency.

Mr. Arora used the example of a person who owns five service stations. Travelling between locations and managing each inventory system separately is a time-consuming process, he explained. As the owner gets more comfortable with new technology, they adopt time-saving measures like cloud-based inventory management platforms. Such steps increase efficiency and make the business more creditworthy.

On a national level, both consumers and transportation-focused industries are spending the savings realized from the prolonged period of lower oil prices.

For signs of how healthy institutional lending is, look no further than the number of outside players looking to purchase loans in the space, Mr. Arora said. Banks like Citibank are buying loans, as are family offices, insurance companies and others attracted by the combination of innovation and the low yields available elsewhere.

Add in new products with terms as long as seven years and as short as 60 days and it is a great time for investors to buy Biz2Credit loans, Mr. Arora said.

The nature of data generation is the more you have and the longer you have been collecting it, the more predictive it can be with skilled personnel, so Biz2Credit’s models will get better, Mr. Arora explained. They are incorporating data from the U.S. Federal Reserve and are constantly updating existing customer data to produce a faster, richer, and more predictive model.

Mr. Arora said there are three main reasons why institutional lenders have an approval rate nearly triple that of banks. The first is institutional lenders are not weighed down with servicing a series of buildings, mainframe systems and other factors associated with traditional enterprises.

The second reason is the amount of regulation which slows those players down.

The final reason is institutional lenders are the most open to automation and new algorithms.

Banks have been slow to adapt to the new possibilities, and they are losing business because of it, Mr. Arora said.

“Banks have their ideal borrowers in a small box. Whether you are seven percent qualified or if you are 99 percent qualified, they won’t do it. You have to be perfect.”

Banks also employ old underwriting standards that were developed before a number of different types of commerce became popular. They struggle to understand service industries and online vendors, Mr. Arora said.

“Banks may not have reviewed their underwriting standards for seven to nine years. While technology is changing underwriting models they are stuck 10 years back.”

“They haven’t deployed technology and still expect people to come into a branch and fill out a bunch of paperwork.”

One sector on its last legs are cash advance companies, Mr. Arora said. Even now they are working with the most desperate of business owners and as the economy improves, fewer companies will be that desperate. That forces them to spend more on marketing while leaving less for the technology they sorely need.