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Industry Outlook: Top Predictions for Small Business Lending

The Covid-19 pandemic changed the financial landscape for all of us. It’s clear that the economy and business operations will never go back to “life as usual.”

But as the economy comes out on the other side of the pandemic, the demand for capital remains strong—there is opportunity in the midst of hardship. 

In this scenario, the small business lending industry has experienced an explosive shift, and lenders won’t survive unless they adapt to the new digital model. 

This transition has been characterized by rapidly changing markets, fueled by high levels of consumer and business uncertainty. Many small businesses are struggling to adapt to a new playing field, and now more than ever, they realize they need funding options designed specifically for them.

Small business lending survival hinges on the ability of lenders to evolve to meet these new demands. And leveraging new technology can help to better serve customers.  

In this article, we will examine the lessons that small business lending has learned from the pandemic and present some predictions on where the small business lending industry is headed in the coming years. 

What We Learned From the Pandemic

History has proven that times of crisis have not been kind to the small business sector, leading to a radical decline in small business lending activity. However, the pandemic of 2020 was different. 

When the pandemic was just getting started, the federal government stepped in by offering the Paycheck Protection Program (PPP) under the CARES Act. The Small Business Administration (SBA) provided nearly $800 billion in funding through more than 11 million loans. Many of these loans went to small business owners who would have struggled to gain loans through traditional banking institutions. 

Perhaps this was the impetus for the shift to a digital framework. Brick and mortar banks lost their hold on the market as competition ballooned and small businesses swiftly gravitated toward a streamlined experience with best-in-class customer service. 

The size of the digital lending market is staggering. One study found that “the global digital lending platform market size was valued at USD 5.84 billion in 2021 and is expected to register a compound annual growth rate (CAGR) of 25.9% from 2022 to 2030.”

 What’s driving the growth? The following trends are pushing the industry forward. 

Three Industry Predictions for SMB Lending

What does the future hold for small business lenders? Here are a few key predictions based on what the sector has observed and how it has performed over the last few years in the shadow of a global pandemic. 

1) Demand For SMB Funding Will Hold Strong

Small businesses are too important in our economy to ignore. In spite of the economic ramifications caused by COVID-19, small businesses continue to account for nearly 50% of all American jobs and contribute a whopping 43.5% of the U.S. GDP

The recent rate hikes will likely increase SMB demand for funding, but traditional banks are not adapting to meet the needs of small businesses. This means small businesses are actively seeking digital options that remove all obstacles to their success. 

Small businesses need funding to survive. 

Alternative lenders are well positioned to meet the growing demand for small business funding, especially as an economic downturn may well increase the need to meet immediate cash flow when business is slow. 

2) Adaptability Will Drive Scalability

Over the last two years, the small business lending market has evolved in a number of ways. Now with the pandemic behind us, we are entering a new period of economic uncertainty. 

The pandemic left small business lenders with a choice: embrace digitization or risk declining income and business closure. Traditional organizations that don’t adopt digital methods won’t last long in this changing environment. 

Agility has long been a challenge for lenders, as the industry has been dominated by traditional organizations with legacy processes and technology. Many small business lenders recognize the need for change but still fall back on outdated systems that make it difficult to harness the large amounts of data available.

While the next challenge may not be in the form of a global pandemic, future-proofing a lending business comes down to adaptability and the ability to nimbly change course when needed. 

Agility for small business lenders means: 

  • A better, more personal user experience.
  • Efficient internal processes that drive down costs.
  • A significant competitive advantage that leads to more market share. 

Whereas pre-Covid SMB lending was all about high volume, low touch, we are now entering a high touch, high volume era. The focus is now on understanding what small businesses need, and incorporating the right tools to give them the best customer experience possible.

3) Customers Want an Experience Tailored for Small Businesses

During times of economic uncertainty, speed and convenience are even more critical to the survival of small businesses. Same-day funding can be a massive draw for small businesses that need cash flow to make ends meet. They need a loan decision today, not three weeks from now. 

Traditional lending processes are cumbersome for both lenders and borrowers. And banks who don’t choose to digitize at least a portion of their processes are going to suffer the loss of business customers. 

The most recent Small Business Credit Survey put out by the Federal Reserve examined small business borrowing behavior in 2021. 

The findings reveal what small business customers are looking for (and failing to find) with traditional banks. Firms are desperate for funding as they strive to build post-pandemic, but they are so discouraged by their borrowing experience they are taking other drastic measures to cut costs rather than put the effort into pursuing funds. 

Many small businesses are choosing not to even apply for critical funding because programs are confusing or they can’t find a program to fit the needs of their business. Of the 66% of firms who chose not to apply for financing over a 12-month period, more than half were in need of funds but believe that lenders do not approve financing for businesses like theirs or lender requirements are too strict. 

4) Regulation Is On The Horizon for Alternative Lenders

While alternative lending is taking off in terms of popularity, it is still relatively unregulated when compared to traditional methods. Famous restrictive requirements that apply to major banking institutions like the Dodd-Frank Act of 2010 don’t apply to alternative lenders. However, the environment could soon change as the rise in loan volume is starting to come under the scrutiny of the U.S. government.  

Up until now, the alternative lending industry in the U.S. has been largely self-regulated through trade organizations like the Innovative Lending Platform Association, in conjunction with some oversight from the SEC. Yet alternative lending faces many of the same risks as traditional banking, such as fraud, capital loss, and money laundering. Both consumers and lending institutions need formal insulation from such risks. 

Digital lending is extremely diverse and technologically advanced, which could make regulation design a difficult undertaking. There are state-specific and federal lending regulations that DO apply to alternative lending, although these can be highly inconsistent from state to state. 

One World Bank report predicts that a regulatory overhaul is imminent, with purpose-built regulatory frameworks on the way for many jurisdictions across the globe that will “prioritize checks on investor exposure, rigorous due diligence on fundraisers, client money protection and appropriate online marketing standards.” 

5) Alternative Lending Will Help SMEs Hedge Inflation

On the top of everyone’s mind right now is the tightening monetary policy resulting in skyrocketing inflation. This puts small businesses in an even more precarious position with a greater barrier to entry for funding, building on their existing hesitancy to pursue funding referenced above. 

In this environment, banks are becoming more cautious than ever. And just as businesses were starting to recover from the pandemic, they’re now facing pressure from all sides amid rising costs for everything from inventory to rent and navigating any lingering supply chain issues. 

Alternative lenders are poised for success and can be an effective strategy for SMEs to hedge inflation. They’re an increasingly appealing option given their ability to precisely meet the needs of small businesses with a much lower barrier to entry. Alternative lenders should lean heavily into communicating their continuously rising approval rates, which – as reported by Forbes – have increased month over month throughout the summer. 

In Conclusion

While the economics of the future may be uncertain, it’s clear where the small business lending industry is headed. Agility, speed, convenience, and a personal user experience are required for future success. The only way lenders can maintain a competitive edge is to get on board with the technology transformation. 

Future-proofing your lending business has never been easier. With Onyx IQ, small business lenders can automate every aspect of their business, from origination to reporting. Forget the manual processes of yesteryear. It’s time to modernize with workflow templates, real-time portfolio monitoring, customizable business credit scorecards, and more.

Schedule your Onyx IQ demo today or reach out to us directly at to get better results faster. 

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