Small and Medium-sized Enterprises represent nearly 90% of all businesses, according to the World Bank. For banks and other lenders, they are also a key and loyal customer segment. However, in recent years, SME lending from these institutions has decreased significantly due to low profit margins and the risks associated with lending to young businesses — and the relationship is beginning to fray. Automated loan origination can help rebuild the relationship, offering lenders the opportunity to simplify the lending process, enhance speed, provide price transparency and, most important, bring in SME loans in huge volumes, safely. In this article, Travis Wilson and Anna Pifferi, Senior Regional Sales Managers at Q2, explain why the time is right to automate SME loan origination.

Why are banks and lenders turning to automated loan origination providers?

Travis: Traditional lenders are beginning to wise up to the vast opportunity of lending to SMEs, but they also recognise that SMEs tastes have changed. SMEs want access to funds faster than ever before. We live in the “Age of Now” and that ranges from social media to online shopping to accessing funds and loans. Turnaround times with automated loan origination software is far quicker than the traditional model of servicing SMEs and the efficiency gains benefit both parties.

Anna: Loan origination software ensures that the SME uploads exactly the right documents before it is sent over for approval. This means the bank or lender spends less time ensuring they have the right materials and means that the SME is more likely to get their loan sooner rather than later. Because of the way the software is designed it also means all parties can trust the information shared between them because it’s there to see on an online repository. It makes it easier to meet regulations.

What role has the pandemic played in the need for automated loan origination software?

Anna: The pandemic has brought a natural liquidity crunch and spending went down significantly. Therefore, the need to access additional funds, in a very short amount of time, has made lending more relevant than ever. SMEs have also shifted how they look at the market, recognising that there is less of a need for face-to-face lending interactions. There is no need for the wet signature. Everything now needs to be done remotely. Banks and lenders that can meet these needs will win new business.

Travis: Why should banks and lenders take note? Well, in the early days of the pandemic, we saw many businesses need to access government support through the Coronavirus Business Interruption Loan Scheme, and that access to funds needed to be driven through digital channels. So, what you saw is a lot of lenders hastening their digital transformation campaigns and automate as much of their loan origination processes as possible. Many of those did so by working with a partner like Q2.

How does loan software improve the origination process and onboarding of SMEs? 

Anna: It’s all about the efficiency gains, and it works both ways. In the past, banks and lenders were forced to spend hours in a physical location going through the documentation brought in by an SME. Often, they missed a crucial document and that meant a second meeting was needed. With automated loan origination software there’s no need to conduct the meeting in a physical location. Both the lender and SME can check the online portal to check what is needed next from the process and act where necessary. Obviously, this level of transparency is a great improvement over traditional services, which means SMEs spend less time applying for funds and more time putting their cash to work.

How does automated loan origination software simplify the underwriting process for lenders?

Travis: It’s all about driving efficiency between frontline and credit or frontline and underwriting. There’s no need to go back to the clients, or the SME in this case, multiple times. Once the SME has submitted their loan application through the loan origination software, all the documentation that the RM needed to gather is then handed over to the underwriter or the underwriting team.

Historically, what would happen is the RM would gather some documentation and then turn it over to the underwriting team and there would be things missing. The lender would need to go back to the SME to ask for more documentation, and then — like Anna just said — everything’s there in front of them and there’s less chance of submitting an incomplete application. So, once again, it’s just about driving efficiency gains, improving that level of service, and getting the funds to the SME quicker.

Are there any other benefits worth mentioning?

Anna: For lenders, automation can really simplify the way fees are paid, the way they can restructure their payment schedule, the way they can invoice, and the way that payments are tracked, which is particularly useful if anything is missing from the SME. On the SME side, it’s very simple in the sense that they have greater visibility to see what is outstanding, what kind of payments are due, and what options they have if they want to renegotiate their loan if needed. These are great selling points for lenders.

What risks are associated with automating loan origination software?

Anna: Many clients come to us that have built their own solution. The main challenge they come across is a lack of scalability. The other thing they do is cobble together a patchwork of software architecture rather than develop a single solution that will do the service end-to-end, like Q2’s. This approach means that the various parts often have difficulties communicating and employees end up doing lots of manual work to keep things up and running. There’s a huge repetitional risk here because you might send out the wrong information or give an incorrect rate. The other big problem this causes is an increased risk of downtime because if one piece of the puzzle fails, your whole architecture goes down.

Travis: Q2’s software mitigates this risk by delivering a back-to-back, end-to-end solution, making it a single source of truth. It is an API-led, modern technology, and we leverage the Salesforce tech stack, which helps us to ensure security and flexibility. We’ve seen banks and lenders attempt to digitalise their service time and time again and often it goes wrong. Our opinion is that the best way to automate your SME loan service as simply and efficiently as possible is to work with an established software provider.

To find out how Q2’s loan origination software could benefit you, visit our website here.