Running a small business anywhere in the world comes with many hurdles. Considering small businesses are the cornerstone for so many economies, accounting for 44% of U.S. economic activity and employing 47.1% of the private workforce according to the U.S. Small Business Administration (SBA), it raises a question as to why small businesses encounter so many challenges.

A quick Google search on the challenges small and medium-scale businesses face will return thousands of results, the most common being lack of funds. Accessing capital remains a bottleneck for so many small businesses that a 2022 Federal Reserve Small Business Credit Survey found that 76% of small businesses experienced financial challenges in the prior 12 months, with 38% citing credit availability as a top concern.

In a 2023 survey by Goldman Sachs, 6 out of 10 small business owners who applied for a business loan found it difficult to find affordable financing, and 77% expressed concerns about access to capital.

This year alone, ‘80% of the small businesses in the U.S. are ‘underserved.’ To address this gap and expand your lending services to small business owners, consider implementing these seven effective strategies:

7 Strategies to effectively lend more to small businesses 

1. Expand Access to Credit

Alternative Credit Scoring Models

Traditional credit scores often exclude a significant portion of the small business population, particularly those without a long credit history. You can explore alternative credit scoring models that consider factors such as cash flow, business performance, and industry-specific metrics. A Federal Reserve Bank of New York study found that alternative data can improve credit risk models by up to 90%.

Non-Traditional Data Sources

Leveraging non-traditional data sources, such as business bank accounts, online reviews, and social media activity, can provide valuable insights into a small business’s financial health and creditworthiness. This approach can help lenders identify and assess borrowers who traditional credit scoring methods may underserve.

Flexible Loan Terms and Repayment Options

Offering flexible loan terms, such as shorter-term loans or revenue-based financing, can make credit more accessible to small businesses with varying cash flow cycles. Additionally, providing repayment options that align with the borrower’s cash flow, such as seasonal or project-based repayment plans, can improve loan performance.

2. Simplify the Loan Application Process

Streamlined Online Application

A user-friendly online application process can significantly reduce the time and effort required for small businesses to apply for loans. The National Small Business Association reports that 27% of small businesses couldn’t obtain adequate financing, often due to a mismatch between available products and their specific needs. By minimizing paperwork and simplifying the process, lenders can attract a wider pool of applicants and improve the overall borrower experience.

Reduced Documentation Requirements

Excessive documentation can be a major hurdle for small businesses. Lenders can streamline the application process by reducing the required documentation and focusing on the most relevant information. This can help to expedite loan approvals and improve borrower satisfaction.

Technology-Driven Decision Making

Leveraging technology to automate parts of the loan application process can accelerate decision-making and improve efficiency. For example, using artificial intelligence (AI) to assess loan applications can help lenders identify potential risks and opportunities more quickly.

3. Develop Customized Loan Products

Personalize Loans to Business Needs

Businesses have unique financial needs. Lenders can offer industry-specific, size-appropriate, and growth-stage tailored loan solutions. For instance, long-term loans can fuel expansion projects, while short-term loans can facilitate inventory purchases, demonstrating the value of adaptive financing.

Enable Development and Extension

Small businesses often require financing to support expansion initiatives, seize new opportunities, and enhance productivity and competitiveness. Tailored financial products that cater to specific needs can provide invaluable support. Examples include bridge financing to bridge short-term funding gaps, capital expenditure financing for equipment purchases or facility upgrades, and expansion loans for establishing new locations, product lines, or markets.

Elevating Small Business Support

In addition to financial products, the value proposition for small business borrowers can be greatly enhanced by offering personalized advice and support. This includes access to business advisors or dedicated relationship managers for ongoing guidance, participation in financial planning workshops covering management, budgeting, and cash flow forecasting, and opportunities for networking and industry connections. These tailored services aim to empower small businesses with the tools and insights needed to thrive and grow.

4. Build Strong Partnerships

Government Agencies and Non-profits

Collaborating with government agencies and non-profit organizations can help lenders reach a wider audience of small businesses and access additional resources. These partnerships can also provide opportunities for joint marketing and outreach efforts.

Industry Associations and Chambers of Commerce

Partnering with industry associations and chambers of commerce allows lenders to connect with specific business communities and gain insights into industry trends and challenges. This can help lenders tailor their loan products and services to meet the unique needs of these businesses.

Technology Platforms

Leveraging technology platforms that connect lenders with borrowers can expand reach and facilitate efficient loan origination. These platforms can also provide valuable data and insights into borrower behavior and preferences.

5. Leverage Technology for Efficiency

Automation and Efficiency

Implementing automation technologies can streamline loan processing, reduce operational costs, and improve turnaround times. This allows lenders to focus on building relationships with borrowers and providing exceptional customer service.

Data Analytics

Utilizing data analytics can help lenders identify trends, assess risk, and tailor loan products to specific borrower segments. By leveraging data-driven insights, lenders can make more informed decisions and optimize their portfolios.

Cloud-Based Solutions

Adopting cloud-based solutions can enhance scalability, flexibility, and security. Cloud technology enables lenders to access data and applications from anywhere, improving collaboration and decision-making.

6. Focus on Customer Experience

Excellent Customer Service

Providing exceptional customer service is essential for building long-term relationships with small business borrowers. Lenders should prioritize responsiveness, transparency, and personalized support throughout the loan lifecycle.

Personalized Loan Products

Offering loan products tailored to the specific needs of different small business segments can demonstrate a lender’s commitment to understanding their customers. This approach can lead to higher customer satisfaction and loyalty.

Long-Term Relationships

Building strong relationships with small business borrowers is key to fostering loyalty and repeat business. Lenders can achieve this by providing ongoing support and demonstrating a genuine interest in their customers’ success.

7. Manage Risk Effectively

Portfolio Diversification

Diversifying the loan portfolio across different industries, loan sizes, and borrower profiles can help mitigate risk. By spreading credit risk, lenders can reduce the impact of potential defaults.

Robust Risk Assessment Models

Implementing sophisticated risk assessment models can help lenders accurately assess borrower creditworthiness and identify potential risks. This enables lenders to make informed lending decisions and minimize losses.

Credit Insurance and Loan Guarantees

Leveraging credit insurance or loan guarantees can provide an additional layer of protection for lenders. These products can help mitigate credit risk and enhance investor confidence.

Benefits of Lending More to Small Businesses

Here are some key benefits of increasing lending to small businesses:

1. Economic growth stimulation: Small businesses often collaborate and form clusters, especially in tech and creative industries. More funding can accelerate the development of these ecosystems, leading to exponential growth and breakthrough innovations. Increased lending can help them expand, hire more employees, and boost overall economic activity.
2. Addressing market gaps: Small businesses are often more agile and better positioned to serve niche markets or underserved communities. Increased lending can enable them to fill market gaps that larger corporations might overlook, leading to more diverse product and service offerings.
3. Local community development: Small businesses tend to be deeply rooted in their local communities. Supporting them through lending can contribute to community development and revitalization.
4. Increased competition: Many small businesses are at the forefront of sustainability efforts. Increased lending can fuel the growth of eco-friendly startups and help existing small businesses transition to more sustainable practices, contributing to broader environmental goals. This can help level the playing field with larger corporations, fostering healthy market competition.
5. Enhancing supply chain resilience: The COVID-19 pandemic exposed vulnerabilities in global supply chains. Lending more to small, local suppliers can help create more robust and localized supply networks, leading to a resilient economy. 
6. Enhanced productivity: Access to capital allows small businesses to invest in better equipment, technology, and training, potentially boosting productivity.
7. Export promotion: With additional funding, small businesses may be better positioned to enter international markets, contributing to export growth.

Conclusion

Lending to small businesses effectively necessitates a calculated strategy incorporating technology, personalization, thorough risk assessment, solid interpersonal connections, teamwork, efficient procedures, and a dedication to continuous improvement. Lenders can enhance their lending capacity and promote economic resilience and community growth by putting these measures into practice. 

In addition to fostering innovation, job creation, and sustainable development, supporting small businesses with proactive support and customized finance solutions also helps them succeed.