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How Technology Powers Underwriting for SME Lenders

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SME lending has forever changed the way we see traditional financing, as it has democratized access to capital. 

The backbone of this increasingly popular alternative to big banks and credit unions? Underwriting.

It’s a hard truth that many small businesses that are in need of financing are often missing the financial data that SME lenders need to easily analyze/determine creditworthiness. Here is where technology and big data are saving the day.

In today’s article, we’ll look into how innovative technology is helping to make the underwriting process more agile and reliable. As a bonus, we’ll also take a brief look at what role the underwriter of the future will play.

Underwriting in Alternative Lending: A Brief Overview

Traditionally, underwriting in the world of SME/alternative lending has been a time-consuming process. For many MCA and SME lenders out there, it still is.

Manually reviewing PDFs, phone calls with borrowers to request further documentation, never-ending email chains, and sheets upon sheets of scattered information… with no guarantee that the information is even enough.

In essence, it’s a time-consuming, error-prone, and limited way of working for underwriters, who are then responsible for making judgment calls based on this limited data.

This manual underwriting can take several days or weeks to complete, and typically results in frustration and anxiety for the borrower, as well as significant overhead for SME lenders.

However, with the advent of new technology, the underwriting process has become faster, more accurate, and more reliable, which has allowed lenders to expand their reach and offer more competitive loans to SMEs.

The shift towards automated, data-driven underwriting has truly transformed the process, resulting in a quick and accurate turnaround. A win for both borrowers and lenders.

How Technology Is Improving Underwriting

So, how exactly is technology boosting the underwriting process?

Here are five ways modern tech solutions have made underwriting for SME lenders more reliable and profitable.

1. Alternative Data Sources for Risk Analysis

Modern tech now allows alternative lenders to pull data from a myriad of data sources (including social media), to better understand borrowers’ financial behavior and history.

Alternative data sources help us look beyond a merchant’s FICO score, a risk management tool that has proved to be inadequate as a standalone assessment methodology.  Leveraging alternative data allows lenders to:

  • Assess risk and fund deals with merchants they might have previously overlooked.
  • Move beyond the incomplete financial information that borrowers piecemeal together. 

Some examples of alternative data sources include a merchant’s bill payments history, such as utility, rental, and insurance, social media usage, and property records. Also, something as simple as a Google search or a public data request can help lenders fill in financial data gaps, and make better-informed decisions.

This allows lenders to process loan applications faster, from a larger pool of borrowers, including those with credit histories that require a more nuanced analysis (i.e., those borrowers that would normally be overlooked by traditional lenders).

2. Automation

Automation has revolutionized underwriting in alternative lending, making the process faster and more efficient. 

With automated underwriting systems that incorporate innovative decision engines, lenders can quickly analyze data and provide insights to aid underwriters in the credit decisioning process.

Automation also helps lenders reduce the cost of evaluating loan applications, allowing them to offer loans at more competitive rates and lower fees.

3. Borrower Experience

Technology is also transforming the borrower experience in the alternative lending industry.

Specifically in underwriting, by leveraging the richness of alternative data sources, SME lenders can provide a bespoke loan experience for each borrower, according to their individual needs and situation. 

Technology also makes the underwriting process much more transparent, as SaaS loan management platforms provide borrowers with multiple communication touchpoints to track the progress of their applications and receive updates in real time.

At the end of day, all this leads to a more positive customer experience and better loan outcomes. 

4. Scalability

Traditional financing relies on manual verification of each loan applicant—this not only is unnecessarily time-consuming, but it also limits scalability.

Today, automated underwriting workflows make it easier for lenders to scale their operations, as enhanced security features can verify identities in no time, and from anywhere.

Geotagging, eKYC, eSigning, and other digital verification tools are now being used to quickly determine the identity of customers, wherever they are across the country (and globe).

5. Turnaround Time (TAT)

For SME lenders, technology has transformed the underwriting process by reducing the extensive and lethargic application process, leading to faster turnaround times.

A long and slow application period is not only costly for SME lenders, but it also leads to a high rate of abandonment from the borrower side.

Powered by data analytics and agile tech, new platforms have made it possible for underwriters to evaluate and classify loan applications quickly and accurately. Again, this allows them to cut costs while significantly improving customer retention rates.

The Underwriter of the Future

Will technology make underwriters obsolete? While there are arguments on both sides, the answer seems to be a clear no… with an important caveat.

Here it is:

Technology is unlikely to replace underwriters as subject matter experts (especially on $1M+ deals). However, it will most certainly take on the lion’s share of the burden when it comes to data gathering and risk analysis.

However, most industry leaders agree that there will always exist the need for human judgment, especially in complex deals. What leaders do suggest is that underwriters begin to evolve as technology evolves. That is to say, they develop new skills that can meet the future needs of the industry, understanding that new tools will arise that reduce the need for time-consuming manual tasks traditionally associated with underwriting.

For example, skills related to business development, sales, advanced analytics, and product marketing will all prove valuable as the industry continues to advance and evolve. 

Onyx IQ: A Single Ecosystem For All Underwriting Functions

Are you interested in learning more about how technology is driving underwriting innovation in the alternative lending industry? Onyx IQ is here to help.
We offer an advanced automated underwriting software to help you develop efficient, fast, and cost-effective underwriting workflows.

Demo Onyx IQ today!

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