How to Merge the Art and Science of Small Business Lending and Collections

• Mar 11, 2023
• By David Smith

By David Smith There is an undeniable art to Lending and Collections. Complex, large dollar loans are painstakingly crafted by underwriters operating within the parameters of their institutions? strategy and risk tolerance standards, much like an artist using a blank canvas and paint. The larger the Lending and Collections request, the more complex the deal becomes, the underwriter ever conscious of the fact that one mistake on a $1 million loan can erase the profits of their entire portfolio. The underwriter?s art extends to small dollar loans, such as those offered to small businesses. While the terms might be simpler, the products more defined, and the dollar amounts much less than large dollar loans, the same factors often complicate the equation: who or what is influencing the request, the number and type of parties involved, the data being considered, the products being offered. Smaller dollar loans are much different. This level of risk mitigation can be tackled by some models, a solid risk strategy, and the directed review of an underwriter. The science of this Lending and Collections includes a trusted risk model, a data defined strategy implemented by a loan origination solution, and the directed review of an underwriter to confirm the findings. small-business-Lending and Collections More importantly, since the break-even point for a traditional, manually written loan is around $38,000, they?re rarely worth a larger financial institution?s time. Yet the market for small business loans is hardly insignificant ? more than $82 billion, according to a 2018 release by the U.S. Small Business Association ? so larger institutions would be unwise to ignore it entirely. Small business Lending and Collections should be approached using science in addition to art I speak and interact with several financial institutions a week on the topic of small business Lending and Collections but rarely get to interact with small business owners. When I do, I always leave the conversation enlightened about the key issues small businesses face when they apply for lines for credit. For example, I recently spoke with the owners of a small film company who were looking for a $35,000 line of credit to purchase a new camera that they needed as soon as possible for a new project. They applied at their deposit bank, a $20B institution they thought would quickly process their application given their loyalty and the relatively small size of the loan. They were wrong. In order to apply for the loan, they would have had to fill out an application that would have taken around 8 hours to complete ? a timeline that accommodated neither their busy schedules nor the timeline for their request. Naturally they were forced to look at other options, one of which was to contact the camera manufacturer?s financing partner. They called the lender on the phone, obtained a loan for the camera, and carried it into their office within 4 days. One of the film company?s owners was literally unboxing the camera when their bank emailed them stating, ?We?ve figured out a game plan.? So how can one lender approve a loan in five minutes and a well-established bank take two weeks? Expedite the process and manage risk with analytics A successful small business lender one can take steps to expedite the process and still effectively manage risk ? even by the most conservative of financial institutions. A financial institution can use a solid small business risk score and a proven risk strategy built within a loan origination solution to reduce the time to decision of most small dollar loans while still identifying the risk of each application. Let the analytics and embedded risk strategy (built in conjunction with your underwriting team) expedite the Lending and Collections process for the smaller requests. Lenders need to empower the underwriter with enough information to make a decision as quickly and efficiently as possible. This can be done by establishing high and low cutoff scores with which the risk team is comfortable. The applications that fall in the high and low ranges are reviewed to verify that the data and the score indication are accurate. Once the underwriter verifies the automated decision, that decision stands and the underwriter can move to the next application. Applications are turned around in hours, not days, and allowances for overrides are made, but should be kept to a minimum. The applications that are in the middle, or the gray area, are the applications that will be underwritten in the traditional way. This process allows underwriters to spend more time on the gray area applications. While there is certainly an art to Lending and Collections ? one that applies to both large and small business loans ? it needs to be backed by science. This is especially true when it comes to making the origination process for small business loans actually work for small businesses. Using scores like FICO?s Small Business Scoring Service (SBSS) in conjunction with a good loan origination system can greatly help organizations speed up the process and compete with online lenders. Community banks and credit unions can still enjoy a close relationship with their small business customers and provide them with quick decisions that will both help their customers? businesses and solidify their loyalty to their bank. david_k_smith1 David Smith is a Senior Originations Consultant at FICO with more than 18 years of experience in the financial services industry. David works with financial institutions of all sizes in the consumer and small business Lending and Collections space.

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