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Summary
Banks have long placed limitations on their lending to small and medium-sized businesses (SMBs) due to various factors. While some regional and local banks prioritize SMBs, securing funding remains challenging for many small businesses.
Small businesses account for up to -40% of the $29 trillion gross domestic product (GDP) in the United States, yet almost 50% of small businesses do not receive all or part of the financing they seek. This challenge underscores the urgent need for a small business lending revolution.
What if we now find ourselves at a turning point that could transform the way in which small businesses are funded?
A confluence of factors-advances in technology, data, and analytics, combined with open banking, innovative fintech solutions, a greater preparedness to streamline regulation, and changing capital pools (such as private credit)-is setting the stage for an unprecedented shift.
Why the time for revolution is now!
What if advances in data, analytics and technology, together with the entry of new forms of capital providers, could fundamentally change the way in which SMBs access capital? Could the relevant risk now be more easily matched with investors willing (and indeed eager) to underwrite it?
We believe that we have arrived at a fundamental inflection point where these conditions are now being met, opening new horizons in SMB lending.
Origination
A fundamental transformation in how small businesses access funding is underway. This is due to the increasing digitization of business activities and records, the prominence of embedded finance, and the potential for integrated solutions to meet the needs of small business owners in increasingly personalized and effective ways.
Underwriting
Recent developments in data and analytics will greatly improve SMB underwriting by enhancing efficiency and reducing labor-intensive processes. BCG estimates that implementing advanced analytical credit decisioning and monitoring systems can reduce the total cost of the end-to-end credit process by 30% to 40%.
Financing
New sources of institutional capital are crucial for expanding SMB credit access, reducing both the funding gap and borrowing costs. The market for securitizing small business loans is still emerging but promising, with SMB-backed asset-backed securities (ABS) totaling around $2 billion annually, compared to nearly $400 billion in the overall non-mortgage ABS market.
The impending revolution in small business financing is sure to reshape the financial ecosystem. Download the whitepaper to know more.
