Part I: How to enter the commercial lending space (11 high-growth business lending sectors)

Before we get into the neat and grit of commercial lending automation, let’s size up the business opportunity we’re talking about. 

• The total estimated value of the US small business lending market, according to the Consumer Financial Protection Bureau (CFPB) is $1.4 trillion. 
• International B2B lending market, according to a World Bank report, the world’s micro, small, and medium-size enterprises have unmet finance needs of approximately $5.2 trillion a year. 
• SME loan sizes for a large bank average $564k, for a small bank – $185k and for an alternative B2B lender -$80k. 

Looks like a market ripe for an innovative lender to take their share, right?  

It is.  

But at the same time, large, non-local banks are responsible for 89.5% of loans under $100k given to small businesses and an even larger proportion of bigger loans. 

This disproportion business lending giants leads to statistics like these: 

• About 30% of business finance applications are declined because of insufficient credit history data. Keep in mind that often legacy global scoring approaches don’t apply well to niche SME. 
• According to SBA Attorneys, only 20% of businesses qualified for the financing they requested and 48% got any financing at all.  
• According to the Small Business Lending Index,the loan approval rates range from 13% for big banks to 24% for alternative lenders. 

Where local or niche businesses could’ve been financed by specialty lenders or local creditors understanding their needs better, they went to a bank. And most often got declined. 

The unserviced part of the market remains huge. It used to make sense, because legacy commercial lending automation used to be boutique and therefore expensive that only a mammoth financial institution could afford to maintain it.  

But it doesn’t anymore. 

Even though this status quo was held for a while, the B2B lending technology market has changed dramatically. Making it possible for a wide range of alternative and specialty lenders to automate every part of their commercial lending process in-house achieving lower credit risks, lower margins and operational costs, and therefore, better terms for their business borrowers. 

Before we continue, we wanted to check if you (or your staff) would like this white paper that describes how to automate all parts of the commercial lending process. 

What kind of commercial lenders are there? 

We’ll go into more detail as we delve into the topic of commercial credit automation, but on a high level, commercial lenders can be categorized this way.  

• Specialized commercial lenders – these lenders focus on specific business financing types like equipment leasing or invoice financing. They offer tailored solutions and often show more flexibility than banks. 
• Alternative B2B lenders – they provide non-traditional financing like peer-to-peer lending and crowdfunding, targeting businesses that may not qualify for traditional loans. Higher risk, perhaps, but with the right scoring, decisioning, and overhead – can be a goldmine. 
• Community banks and credit unions – traditional institutions offering commercial lending products such as term loans, lines of credit, and real estate financing. They cater to businesses with established credit and history, typically requiring collateral and stringent lending criteria. 

Commercial lending verticals with the highest growth potential 

It only makes sense to enter a commercial lending space in the industry you know better than most. But within this space, there is a wide range of credit products and approaches your organization can take when extending B2B loans to your customers.  

We closely monitor the global lending trends in the markets we focus on. And in the recent years, we have seen the most significant growth in the following commercial lending verticals in North America, Europe and Southeast Asia: 

1. Direct B2B lending –  a lender provides lump sum loans to businesses, with repayment over a specific period, used for various purposes like expansion or equipment purchase. 
2. Invoice financing/accounts receivable financing – It’s a short-term borrowing where businesses sell their outstanding invoices for immediate cash, improving cash flow and enabling growth. 
3. Equipment financing – It’s a specific loan or lease agreement for businesses to acquire equipment, allowing them to avoid large upfront costs. 
4. Merchant cash advance – It offers businesses a lump sum payment in exchange for a percentage of future credit card sales, suitable for businesses with irregular cash flows. 
5. Business line of credit – It’s a revolving loan providing businesses with access to funds up to a limit, offering flexibility for managing cash flow and financing opportunities. 
6. Business capital – It includes a range of funding options providing capital for growth and expansion, such as equity investments, venture capital, or mezzanine financing. 
7. Employee salaries/payroll financing – It’s a short-term loan that helps businesses cover employee wages during cash flow constraints, ensuring on-time payment. 
8. Digital refinancing – It involves replacing an existing loan with a new one, often with better terms or lower interest rates, improving cash flow and debt management. 
9. Asset-based credit – It uses a company’s assets as collateral for a loan, popular among businesses with valuable assets and strong growth potential. 
10. Inventory finance – It’s a type of asset-based lending using a company’s inventory as collateral, helping businesses meet customer demand and take advantage of bulk purchasing discounts. 
11. Trade finance – It facilitates international trade by providing funding and risk mitigation, including instruments like letters of credit, export credit, and insurance. 

What can you finance as a small business lender? 

And while these are the businesses that come to us most often right now, this doesn’t mean that other B2B verticals are less well-positioned for rapid growth. So the key for a commercial lender is to find your niche, craft the best offering you can on one or several of these items, depending on your small business customers’ current needs. 

• Startup costs 
• Working capital  
• Inventory financing 
• Purchasing equipment and machinery  
• Hiring staff 

With a modern commercial lending platform like TurnKey Commercial, pivoting and adjusting to market changes quickly won’t be a problem. 

Cutting costs and minimizing risks with commercial credit automation 

To carve out your own piece of the commercial lending space, you’ll need to serve your existing or emerging industry better than the competitors.  

Large institutions relying on legacy solutions find it very challenging to develop suitable lending solutions for their SME customers while maintaining viable associated service costs.  

This allows smaller lenders to use lending tech and take up their new roles in the B2B finance lifecycle. Some do b2b loan origination and underwriting while partnering with banks for loan management. Others handle all aspects of commercial lending themselves.  

There are two main approaches, and we’ll go over them in more detail in chapter II. But on a high-level, it’s: 

1. Newcomer commercial lenders build custom solutions consisting of several integrated tools. For example, TurnKey Lender Origination module and Decision Engine integrated into your existing banking system. 
2. Others go for an end-to-end system like end-to-end TurnKey Commercial platform to eliminate any need for data or automation fragmentation. 

Conclusion 

Automation unlocks a window of opportunity for commercial lenders including community banks & credit unions, specialized commercial lenders and alternative B2B lenders.  

Modern lending automation solutions allow you to set up automated credit scoring and decision-making based on the data you choose which allows to lower the credit risk and improve ROI  

With the average interest rate for a small business loan lying between 2.54% – 7.01%, commercial lenders who are agile and informed enough to offer better credit terms while cutting costs, stand to benefit immensely.  

Read this next

This is a part of a 3-chapter series with all you need to know to automate any kind of commercial lending process. You can continue with this course here:

• Part II: All you need to know before you automate your commercial lending process
• Part III: B2B credit automation that cuts operational costs and minimizes credit risk
• White paper: How to automate every part of the commercial lending process