What is lending APIs and how does it impact SME businesses? The World Bank, in research, stated that SMEs account for about 90% of businesses and more than 50% of employment worldwide. Despite their significance, SMEs suffer from typical business hurdles such as funding, compliance, regulatory constraints, and so on. This can make it difficult for SMEs to expand and keep running their businesses. 

For generations, many SMEs have turned to lenders to help in keeping their businesses afloat. However, complicated lending procedures, tight eligibility standards, and long approval delays, all associated with traditional banking systems have long presented difficulties. 

Interestingly, banking and lending institutions are going digital and adopting technology to help transform their operations. One of these technological innovations is the adoption of lending APIs (Application Programming Interfaces). Lending APIs have become a solution for many of the problems facing financial institutions and in turn, are changing the SME business scene.

How Lending APIs Functions

Lending APIs are middlemen that let several financial systems such as banks, credit bureaus, accounting tools, and payment gateways exchange data in real-time. Through this integration, manual data entry is eliminated and the possibility of mistakes resulting from systems running in silos is lessened.

When an SME requests a loan using a platform that employs Lending APIs, for instance, the API can automatically gather financial data from several sources including credit bureau records, accounting software, and bank account information. Automated algorithms then handle and examine this data to evaluate the borrower’s creditworthiness and risk profile. In traditional banking and lending, this process may span days or even weeks. The introduction of lending APIs shortens the whole procedure and wait period ensuring it is completed in a few minutes.

The Difficulties of Conventional Lending for SMEs

Historically, SMEs have had great difficulty obtaining funding from established banks. The World Bank estimated that every year, almost 40% of SMEs in developing countries have unmet funding needs of $5.2 trillion. Several factors are causing this disparity:

1. Strict Eligibility Requirements: Many SMEs, particularly those in their early phases, cannot meet the standards of traditional lenders’ extensive documentation, a clean credit record, and significant collateral.
2. Time-consuming Procedures: Traditional banks’ loan application and approval process might take weeks or even months. These delays may mean lost opportunities or cash flow problems for SMEs who want rapid financing access.
3. Restricted Credit Analysis Methods: Particularly those new or run in non-traditional sectors, traditional credit rating systems can fail to fully represent the financial situation of SMEs. Many decent companies are therefore judged too risky for loans.

3 Impact of Lending APIs on Small and Medium Enterprises

1. Simplifying Loan Approval and Applications: Underwriting, loan origination, and payout all greatly save time and effort using lending APIs. These procedures historically call for hand data input, document validation, and several rounds of borrower and lender correspondence. McKinsey’s analysis claims that by up to 90%, automation via APIs can cut loan processing times, therefore enabling lenders to service more clients and raise customer satisfaction. By automating these chores, APIs speed up loan processing timelines and lower the possibility of mistakes. APIs can, for instance, automatically retrieve financial data from accounting systems, cross-company data with government databases, and evaluate risk using machine learning techniques. By allowing lenders to handle loan applications in a few hours instead of days or weeks, this technology gives SMEs rapid access to desperately needed money.
2. Increase Financial Access: One of the biggest obstacles SMEs have always had is loan access. With the credit gap for official SMEs estimated at $1.5 trillion worldwide, Over 40% of SMEs in developing nations struggle to get the finance they require. Many small firms find it difficult to satisfy the rigorous credit criteria, lengthy application procedures, and substantial documentation that traditional lending systems sometimes demand and lending institutions are unable to lend to SMEs due to these reasons and in order to mitigate their own risk portfolios. Lending APIs help financial institutions to rapidly and effectively evaluate SMEs’ creditworthiness giving SMEs in underdeveloped areas better access to financial services, and helping to close this disparity.
3. Loan Disbursement Accelerated: The loan application process is not the only problem faced by SMEs. Often, SMEs’ performance depends critically on their ability to get finance quickly but after successful application, the disbursement timeframe also greatly affects the operation and performance of SMEs. The entire process from application to fund transfer can be automated.  Within 24 hours, Lending APIs can approve and distribute loans, giving SMEs the fast funding they need to grab development prospects or control cash flow disturbances.

Conclusion

Lending APIs are changing SMEs’ access to and interaction with financial services. APIs are helping small businesses to expand and flourish by expanding access to financing, simplifying loan processes, promoting transparency, and allowing scalability. Nonetheless, lenders must solve the other issues in their daily operations to fully exploit this revolutionary technology. After all, the backbone of the world economy, SMEs, stand to gain greatly from these developments.