For small banks and independent community banks, becoming an active SBA lender offers the potential to increase your bank’s profitability while also providing better service to your small business customers. Created to serve small business owners who can’t obtain loans elsewhere, SBA loans are a valuable source of capital to power entrepreneurs and increase your bank's lending volume with reduced risk.
They can also be a valuable source of profit for small and community banks. In fiscal year 2020, more than $28 billion in loans were guaranteed through traditional SBA lending programs. However, the introduction of the Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL) Program and EIDL Advances added a whopping $736 billion in SBA guaranteed loans in just over 12 months.
Challenges of SBA Lending - Why Bankers Need SBA Loan Software
As small business owners rushed to get the first round of PPP loans, many banks couldn’t move fast enough to meet demand. Confusing application processes, bottlenecks and backlogs frustrated small business owners. Banks that couldn’t keep up with the ferocious speed lost these customers to other institutions that could.
The PPP was an extreme example of the complexity involved in SBA lending. Banks struggled to roll out a new loan program in record time as rules were issued last-minute. As the program expanded, rules changed multiple times, challenging bankers to keep up. Of course, PPP was a one-time response to a never-before-seen pandemic, so you'd expect it to be unique.
But SBA lending is still complicated at the best of times. Each SBA loan program has its own guidelines for eligibility, loan underwriting and loan servicing. To receive the SBA’s loan guaranty, banks must follow strict requirements and ensure due diligence and compliance. The SBA’s guaranty doesn’t mean banks can make riskier loans—just the opposite. Lenders must dot more I’s and cross more T’s to comply with the agency’s rules.
Banks that succeeded with PPP lending were those that chose to use SBA lending software from the start. Moving forward, a digital lending platform can help small and community banks make more SBA loans more easily. The SBA itself has digitized the loan application process with their SBA E-Tran system -- shouldn't you?
What Features to Look For in SBA Lending Software
Small business owners will continue to seek SBA loans as the economy recovers, and forward-thinking banks will use digital lending platforms to help capture small business customers. But as your bank considers an SBA loan origination system, what functionality should you look for? Here are the seven key features an SBA lending platform should have.
Support for all SBA loan products
SBA loan products include 7(a) loans, Microloans, Express loans, CAPlines and, during the pandemic, PPP loans. Each loan product has different rules regarding eligibility and different underwriting standards. A software platform that can handle each type of loan and has the flexibility to accommodate new loan products as they are offered, is critical to speeding up the lending process.
Your chosen SBA lending platform should quickly update to keep pace with changes in SBA loan programs, such as those issued for the PPP. Of course, such updates can’t be instantaneous. However, ask the vendor if you can expect updates to be completed within a few days of rule issuance. Understanding the plan that the software vendor has for incorporating rules changes means that your platform is ready to move at a pace that will benefit your bank.
Borrower-friendly loan application process
Small business owners need to be able to apply for an SBA loan in the way that’s best for them, whether that is coming into a branch, applying online, or a combination of the two. Too often, SBA loans have been challenging to obtain because the application process is too cumbersome for most small business owners (who are extremely busy people) to understand and follow through to completion.
SBA lending software that allows for all options gives your bank the flexibility to meet changing needs. For example, when in-person visits to branches aren’t possible, online applications enable banks to continue serving commercial customers.
Even when using an online loan application process, small business owners may run into issues at some point and need to consult a banker. Others may want guidance from the banker to start the application process before finishing it themselves on their own time. Software that lets users start in the branch and finish online, or vice versa, meets those needs. The ability to save progress and continue later lets borrowers complete applications at their convenience or get answers to questions from a bank's lending experts before they proceed.
Automated data collection
The tedious process of manually gathering data from borrowers and third parties is a huge drag on loan processing. Sorting piles of paper, mailing or faxing documents, reviewing submitted documents, and scanning papers or manually inputting information submitted by borrowers can take days. During this process, errors are likely to be introduced.
Traditional lending also requires financial institutions to contact multiple third-party data sources to request information. Time-consuming back-and-forth with government agencies, banks, credit bureaus and borrowers to request missing information slows the loan process further, while inefficient use of employee time costs money. Meanwhile, small business owners in desperate need are waiting…and waiting.
SBA lending software can automate all of this. Platforms that allow borrowers to upload data online save time and effort for both banks and small business customers. Automated loan origination platforms can check for missing information and request it from the applicant automatically.
Platforms also need the ability to connect your bank with different third-party services that will conduct key underwriting and documentation requirements in the SBA lending workflow. Software with built-in third-party data integrations to gather tax returns, credit scores, identity documents for KYC verification, bank records and more automatically reduces this process to minutes, rather than days. With no need to manually input data, risk of error is greatly reduced.
Look for integration with third-party data services such as TransUnion, Thomson Reuters, Yodlee, Plaid and Finicity.
Automate loan decisioning
Initial loan decisioning can be greatly accelerated with SBA lending software that uses an AI-based decision engine with a rules engine defined by your bank. Using the data you’ve automatically gathered, AI can make immediate decisions that meet your financial institution’s—and the SBA’s—criteria. Having this step in your lending workflow can also reduce the workload on your staff, freeing them to spend more time on complex or highly-valuable cases.
Look for software that can extract cash flow information from applicants’ financial statements and banking records. Analyzing a borrower’s number of deposits, withdrawals and insufficient funds notices (NSFs), and other data can be used to do a lot of important analysis up-front. Software that can estimate EBITDA, compute DSCR and calculate IRR, will save time and effort for your underwriting team. Plus, real-time data gives you a more accurate picture of risk from any given borrower.
The ability to set knock-out criteria can weed out applicants that don’t fit your or the SBA’s criteria. Loans that make the grade can move on to underwriting. Some banks even go so far as to automate the full approval process for small loans, saving underwriting time and dollars while still maintaining full compliance with SBA requirements.
Automated review for underwriting
Reviewing financial ratios, collateral and other data is a time-consuming but necessary step in underwriting SBA loans. SBA loan software using an AI-based decision engine can help in this review. Look for software that sets automatic eligibility criteria based on loan type and pricing rules based on the SBA's government guarantee policy for each type of SBA loan.
Using your bank and SBA criteria, SBA loan software that comes with AI-powered risk assessment tools can assess a borrower's time in business, revenues, cash flow ratio, industry risk, corporate risk, debt-to-income ratio, personal credit score and repayment history, then calculate pricing and other loan terms to configure the loan's interest rate and other terms appropriately.
Look for integration with third-party data validation applications such as Equifax, Thomson Reuters, TransUnion, FICO, LexisNexis, Equifax, Twilio, CSC and Experian.
Flexibility for Bankers
SBA lending solutions are tools to help bankers. As such, any SBA loan software you select should offer plenty of flexibility to fit your bank’s workflow and approach to lending. If your loan officers prefer to follow one kind of process or set of workflow steps, the software should have enough flexibility to incorporate those steps into the tool's standard process.
Look for software that allows for the ability to configure automated workflows. This should come standard. You don't want to be faced with huge customization requirements and custom development tasks - that will only slow your bank down and lead to large expenses down the road. Instead, you want a software solution that will let you decide at implementation the way your teams will use the platform. You should be able to let automation handle more or less of the process as you choose, and bring in human review for decisioning, underwriting or wherever you wish.
Automate closing and customer onboarding
Almost three-quarters of SMB loans (72%) are rejected, according toThe American Bankers Association. When commercial loans are approved, it takes three months on average for borrowers to receive their funds. After loan approval, SBA lending software can speed loan closing by helping banks and credit unions onboard customers and disburse funds to borrowers in a matter of hours, not weeks. Think of how much more satisfied borrowers can be with your bank if they don't have to wait so long to receive their money after they've finished all the required documentation.
Make sure you choose an SBA loan platform that lets you customize the loan closing workflow and fully onboard the customer records into your internal servicing and core banking platforms. The ability to e-sign documents is also critical for rapid closing and loan disbursement.
Look for integration with third-party validation applications such as LexisNexis, DocuSign, Notarize and CSC.
Benefits of SBA Loan Origination Software
Clearly, SBA lending software can save your bank time, money and effort in the loan origination process for SBA guaranteed loans. But there are other benefits too.
Compliance: SBA loan software automatically collects documentation and records the reason behind decision-making, creating an audit trail. This can be used in the future with government regulators to demonstrate compliance and to provide information should any loans, unfortunately, require use of the SBA guaranty. A platform that automates account monitoring and data-gathering after the loan is disbursed also eliminates the need for manual data collection. This streamlines compliance with KYC, AML as well as SBA-specific compliance requirements. Plus it helps the servicing and collections departments be ahead of any potential problems in your loan portfolio before they arise.
Consistent decisions: When loan decisions are made solely by humans, it’s natural for unconscious bias to creep in. Even highly-trained underwriters can sometimes make simple errors, especially if they don't have the visibility into how their decisions are changing over time. Automating loan decisioning and underwriting calculations eliminates bias and allows borrowers to be assessed in a consistent manner without any added slant or bias being introduced. For government lending programs, in which diversity and fairness are a critical factor for banks to incorporate, this is a major benefit.
Give Your Bank the Small Business Advantage With SBA Lending Software
The banking industry has a long way to go when it comes to automation. A whopping 55% of respondents in a survey by Bank Director say their commercial clients can’t apply for loans online; just 13% report having a fully digital lending process. When it comes to SBA loans, it would be no surprise to learn that the number is even smaller. But with new SBA lending software becoming more accessible to banks of all sizes, this is starting to change.
SBA lending software makes it easier to offer the SBA loans your small business customers want. Choosing an SBA loan platform that has built-in integration with all the third-party reporting applications you need, from a vendor with deep experience in commercial lending products, can give your bank the competitive edge it needs in the SBA loan arena.
