Corporate loans for small and medium-sized enterprises – the potential of process automation
The digital transformation has had a lasting impact on all industries in recent years and has fundamentally changed the way business processes are designed. For banks, this change has ushered in a new phase of automation and efficiency, which can be of decisive importance in lending to small and medium-sized enterprises (SMEs). In this article, we look at the current situation in this area of financing for companies and the potential that process automation can offer.
SMEs are the backbone of the German economy and make a significant contribution to job creation, innovation and economic stability. In this context, they also make a significant proportion of annual investments. However, despite their importance, many SMEs face a variety of challenges when it comes to accessing credit.
Overcoming barriers to SME financing through loans
According to the KfW SME Panel, the majority of SMEs finance new investments primarily from their own funds. Despite historically low interest rates in recent years and the excellent potential for leverage effects, bank credit or loans were only used in second place as a source of financing. In fact, many small and medium-sized enterprises have not even attempted to negotiate a loan. In most cases, however, it was not concerns about their own creditworthiness that prevented companies from entering into loan negotiations. On the contrary, according to KfW research, 95% of SMEs have debt sustainability, i.e. they can meet their obligations from their current cash flow and are therefore creditworthy. Rather, the desire for financial independence, concerns about high costs or disclosure and documentation requirements were barriers to financing through loans.
Concerns on the part of borrowers, particularly with regard to the effort involved or the requirements for disclosure and documentation, are not unfounded. While banks have made enormous progress in the automation and digitalization of consumer loans in recent years, this progress is still significantly lower in the area of corporate loans. For example, some banks in the area of corporate financing already lack the simple option of accepting loan applications from companies online. For many banks, it is still common for SME customers to have to fill out forms and send them by post when applying for corporate loans if they do not choose to go to the branch.
SME customers also have to provide full disclosure of their financial circumstances, even for low-volume loan requests. They have to submit annual financial statements, figures for the year, lists of accounts receivable and accounts payable, order backlogs, information on collateral, etc. so that banks can review these documents in a laborious, manual and time-consuming process – and often make a lending decision based on a two-vote rule by the front and back office. This leads to process inefficiencies for the banks with long throughput and processing times and to long waiting times and a lack of transparency for SME customers. The consequences for banks are significant margin losses or, in extreme cases, a lack of cost coverage, which makes the business correspondingly unattractive. For SME customers, access to funding for investments is delayed.
Making companies attractive offers for corporate loans online
Business decision-makers are increasingly looking online for financing options and efficient, straightforward processes. The traditional SME customer, who once went to a bank branch in person to apply for a loan, is now increasingly using digital channels. There, loan comparison platforms and search engines are the first touchpoints for loan offers. Analyses by KfW Research show that personal interaction between SMEs and banks has steadily lost importance, personal contact with banks is being reduced and fewer branch visits are being made.
The COVID-19 pandemic has further accelerated this trend. Providers specializing in online lending to small and medium-sized enterprises are increasingly filling this gap. With a digital presence and simple, automated processes, they are creating new customer experiences and taking customers away from established players. These offerings can also fall under the embedded lending segment, where the conclusion of loans is integrated into overarching platforms. This is a process that has already been observed in the private customer segment in the past. The strategies of lenders in this segment vary. Some not only act as pure competitors to banks, but also offer them their automation solutions for white-label use. Some players also stand out due to their specific offerings and target group definitions, such as working capital loans or companies with low credit ratings, which are traditionally rarely among banks’ prioritized target groups.
Overall, these developments reinforce the need for banks to remain digitally relevant and to create correspondingly attractive offers and touchpoints for corporate loans.
Efficient use of omni-channel approach in corporate lending business
Offline touchpoints – such as a personal consultation – can also play an important role in starting the loan application process. Although the proportion is declining overall, according to KfW research, a significant proportion of SME decision-makers state that they visit the bank branch for their transactions. The key effect of automated processing following a personal appointment is to relieve the burden on customer service. The time and pressure involved in loan processing can be reduced, such as the reviewing of documents. This puts the focus on the consultation and strengthens the customer relationship.
In summary, it can be said that the automated application process for loans should be started flexibly from two starting points: initiated online by the borrower or offline as part of customer service. It is important that both sales channels are considered in the process automation.
Corporate loans as a building block of a needs-based banking offer
The automation of corporate loans holds great potential for banks, particularly in the SME customer segment. Nevertheless, there are still some barriers to leveraging this potential on both the bank and customer side. These include, above all, a lack of digitalization and automation, which lead to process inefficiencies, but also concerns among customers regarding the effort involved or the requirements for disclosing data to create ratings. Nevertheless, the use of digital touchpoints by SME loan customers is increasing. Specialized, purely digital players for loan financing are becoming increasingly important, so banks should invest in their digital competitiveness in this area. In order to offer customers the best possible individual experience, it is advisable to think “omni-channel” in terms of automation and thus combine personal and digital processes.
Overall, this market situation offers attractive opportunities for credit institutions to further develop their services in order to better meet the needs and requirements of their SME customers. The automation of SME lending can not only play a key role in promoting the growth and resilience of these important economic players. It can also help banks to unlock new potential in the SME financing business.
Do you want to make decisive progress in automating your loan application processes in corporate banking? Our BANCOS Onboarding software solution can support you. Find out more online here and feel free to contact us if you would like individual consultation or a personal demo.