By Will Tumulty
Small businesses (SMB) are a vital component of the country’s economy at a local, regional and national level. For context, SMBs comprise 44% of the U.S. GDP with almost half of all private sector employees working for a business on Main Street.
Despite serving a vital role in local communities and the broader U.S. economy, these businesses fail at an astonishing rate, often struggling to secure vital working capital to keep their doors open or expand their operations. According to the U.S. Chamber of Commerce, 33% of SMBs experience challenges or failure due to a lack of capital.
Compounding this issue, many community financial institutions (FIs) lack the capability to deliver capital swiftly and responsibly when SMBs need it most.
Fintechs recognize this need and are bridging the gap in SMB lending by providing affordable modern AI-based tools that help SMB customers access funding more quickly while mitigating risk.
Obstacles in SMB Lending
The SMB lending space is valued at over a trillion dollars, yet smaller FIs have found it difficult to actively participate in a space which has largely been dominated by larger banks. Traditional lending processes can be slow and complex, requiring rigid documentation and tedious manual reviews. For smaller and regional banks, high operational costs and risk exposure associated with SMB lending are partially to blame.
Alongside the cost and risk, smaller institutions tend to operate with outdated systems and siloed customer data, severely hindering their ability to scale SMB lending programs. These factors play a part in preventing banks from adequately assessing borrower risk and slow down the approval process.
Additionally, the industry shift to digital means SMBs expect their banks to mirror the experiences offered by other fintech and consumer-facing platforms. The reality is banks need a way to better serve their small business clients without the responsibility of building costly and time-consuming updates in-house.
Automation Provides a Path Forward
An institution’s technology selection can make or break their small business lending program, and the oversaturation of third-party vendors adds another layer of complexity to this issue. It’s vital for banks to leverage technology that enables smarter and safer lending decisions, such as AI-powered credit models or automated KYC and KYB checks.
One of the more impactful shifts in today’s small business landscape is the growing adoption of intelligent automation for document processing. Manually reviewing documents, particularly PDFs with inconsistent formatting or handwriting, can take underwriters up to 20 minutes per application.
Now, AI-powered solutions can extract and classify this data in seconds and significantly reduce document review time. Some automation even uses machine learning to identify and extract relevant information from unstructured sources and enables lenders to scale their operations without increasing their staff or overhead.
With the right solutions in place, FIs can significantly enhance their portfolio performance, borrower experience and identify risks earlier in the loan process. Ultimately, the benefits derived from technology help reduce costs and improve lending confidence.
Reshaping SMB Lending Through Embedded Finance
Many of the operational obstacles that limit a bank’s SMB lending program can be addressed through scalable embedded lending solutions. Embedded finance provides a streamlined option for banks to expand their SMB lending without shouldering the full weight of credit risk, building infrastructure or servicing.
Instead of managing all aspects of the SMB loan process, banks can integrate white-labeled SMB lending solutions directly into their existing digital platforms by partnering with fintech providers who also bring balance sheet capacity for small business loans. Generally, these solutions are purpose built for managing underwriting, risk assessment and loan servicing.
Creating a More Efficient Lending Environment
Looking ahead, uncertainty is bound to remain a constant theme given current economic disruptions across industries. SMBs will no doubt turn to banks for financing options that allow them to keep their 
doors open and expand their operations.
By partnering with reliable and trusted embedded finance providers, banks can create secure SMB lending platforms while boosting their profitability.
About the Author
Will Tumulty is CEO of Rapid Finance, a leading provider of small business financing and enterprise lending solutions.