The Micro, Small and Medium Enterprise (MSME) market has been disadvantaged in the traditional banking ecosystem. Due to various factors, banks have prioritised credit to corporations and big businesses over small businesses.
According to statistics, India has a total of 633.9 lakh MSMEs in India, comprising 630.5 lakh micro-enterprises and 3.3 lakh small businesses. The rural-urban distribution comprises 324.9 lakh businesses in rural India and 309 lakh businesses in urban areas.
The lack of access to credit has driven small businesses to borrow from money lenders despite being charged higher rates. In terms of sheer numbers, this trend signifies a potential loss of revenues for lending businesses.
However, the situation is gradually changing due to the role played by digital technology in the lending ecosystem.
In this blog, we delve into the key barriers lending businesses face in processing loans for small business borrowers and how using cloud-based lending software is revolutionising small business financing.
Lending to Small Businesses: Some Challenges
Let’s first understand the key challenges experienced by lenders when underwriting for small business borrowers:
1. Lack of Credit History
Traditional bank lenders weigh the creditworthiness of borrowers based on their previous credit history. Hence, those borrowers unable to demonstrate a credit history, such as small businesses, are denied credit opportunities.
2. Lack of Assets
Borrowers who can leverage assets as collateral have a chance of getting access to credit sans a credit history. However, many small businesses do not possess assets.
3. Diverse Needs
Banks typically offer standardised products for borrowers. They prefer to serve loan applications of larger ticket sizes. However, small businesses have diverse needs. Thus, a one-size-fits-all approach does not fit. They may also require small loan amounts. Service providers were not equipped with the right technology to serve their needs.
What Is Cloud-Based Lending Software?
Cloud-Based Lending Software is a comprehensive financial statement analysis solution which helps lenders accurately assess a borrower’s risk profile, irrespective of the scale of the business.
The solution leverages a mix of technologies like automation, cloud computing, optical character recognition, Artificial Intelligence (AI), and Machine Learning (ML) to completely automate all underwriting processes while addressing the current challenges of lenders.
Besides delivering efficiency, accuracy, and speed to the end-to-end financial analysis process, the software’s capabilities are completely transforming the borrowing narrative for small businesses.
Today, banks, neo-banks, and non-banking financial companies (NBFCs) are leveraging its benefits to tap the small business market and turn leads into lifelong customers.
5 Transformative Benefits for Small Businesses
Here’s a look at how the smart use of cloud-based lending software enables lending businesses to serve small business borrowers effectively.
1. Accurate Cash Flow Analysis
Since small businesses lack a credit history and substantial assets, cash flow lending is a potential solution for this audience. With access to bank documents, cloud-based lending software can comprehensively and accurately analyse the daily operational cash flow of a small business.
The software can categorise all transactions and enable lenders to know how much is being earned in revenues, what are the operational costs, and if there is any profit. Furthermore, the software comes with cross-analytical capabilities.
This functionality lets lenders cross-reference a borrower’s sales-related bank transactions with their Goods & Services Tax Returns (GSTR). This is a fool-proof method to determine the actual revenues of a business and its profitability, as sales and GSTR must correspond.
These capabilities enable lenders to pave the way for more cash flow lending, which can serve small businesses with a healthy bottom line.
2. Customisation of Products
Most small businesses require loans of a small ticket size. On the other hand, the needs may vary drastically based on the growth stage of the business.
The use of cloud-based lending software enables the automatic customisation of loan products based on the financial information accessible.
Hence, it can tailor terms and conditions based on the real-time needs of a business, thus making loans more affordable and relevant to a small business’s needs.
3. Reduction of Errors and Omissions
Cloud-based lending software enables end-to-end automation of the financial analysis process, not just the analysis process.
For instance, the software can scan over 700 types of documents, categorise all transactions into multiple categories, and deliver a creditworthiness score within minutes.
The workflow does not require extensive human intervention, except for higher value, strategic input. Thus, lending businesses can run with lean teams, reduce errors, duplications and omissions, and scale up operations quickly.
4. Quicker Turnaround on Loan Approvals
Small businesses that require financing are usually hurrying to meet their borrowing needs. They apply to multiple lenders simultaneously and tend to jump at the first opportunity. Hence, lenders need to respond quickly and efficiently.
Cloud-based lending software allows them to process loan applications quickly, accurately, and efficiently.
5. Builds a Data-Driven Lending Culture
Small businesses may not have the assets and the valuation of larger businesses and corporations. Hence, they encounter many biases and prejudices when attempting to access credit or capital.
The use of tools like cloud-based lending software brings a scientific approach to the process, with data driving the decisions rather than personal opinions and instincts. Businesses can collect massive amounts of data, which gives a more realistic understanding of the financial reality and potential of small business borrowers.
They can develop the right mindset and, in turn, products to meet their needs and unlock more relevant credit opportunities in the future.
Key Takeaway
By harnessing the benefits of cloud-based lending software, lending can effectively serve small businesses and turn them into long-standing customers. As small businesses scale, they can potentially deliver the business of a bigger ticket size to the lender.
Lenders making early investments in technology can grow their small business audience and cultivate a new pipeline of business.
Finezza offers a comprehensive set of tools and solutions to manage your lending portfolio. Our end-to-end lending management solutions are trusted by brands like ftcash, Hiranandani Financial Services, gromor Finance, and UC Inclusive Credit, to name a few.
Finezza’s intuitive bank statement analysis software is geared to analyse bank statements quickly and accurately and detect potential fraud.
Book a demo to know more.
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