Business Growth Loans Seen as Driver of Lending in 2020
Business growth loans are largely seen as the leading source of business loan applications as the economy continues to expand. According to NFIB Chief Economist, William Dunkelberg, “2020 is starting out with a solid foundation for continued growth.” Typically, any businesses looking to grow will need a small business loan. With this in mind, we take a look at the top business lending trends to watch in 2020 and how they could benefit your business.
Small businesses are approaching 2020 with considerably more optimism than 2019, according to the NFIB’s Small Business Optimism Index.
1 Low interest rates expected to continue
The first piece of good news for small business owners is that interest rates are expected to remain low over the next year. The federal funds rate was cut three times in 2019 and stands at between 1.50% and 1.75%.
For 2020 at least, the Fed seems determined to keep rates low. Federal Reserve Chair Jerome Powell recently said, “The current stance of monetary policy likely will remain appropriate.”
Cheaper money will reduce small businesses’ interest burden. It will also allow them to borrow more and expand faster. Business growth loans will surely benefit from this trend.
2 Fintech boom brings more lenders
One of the key business lending trends to watch in 2020 is a continued growth in business borrowing options brought by new technology.
Fintech companies are attracting billions of dollars in investment. In the last eight years of record, investment in the sector grew annually from $2 billion to over $50 billion.
Lending counts for a considerable chunk of this sector. Fintech companies have managed to streamline the user experience and introduced mobile apps that offer easier and faster ways to borrow money.
Fintech innovations bring lending platforms that welcome small business owners who were turned down by traditional banks. In 2020, an increasing number of small businesses will be able to access the loans they need.
3 A growing use of artificial intelligence
Start-ups, traditional banks, and other financial institutions are all investing heavily in artificial intelligence. Many are using it to improve a wide variety of financial services, such as wealth management, mortgage lending, refinances, and the entire lending process.
AI, which is a type of machine learning, is being used to fully automate lending and reduce underwriting time, with better risk assessment measures. This means loans can be granted much faster.
In 2020, small business owners should start to see fairer and better-quality loans thanks to AI.
4 Faster business loans
Fintech companies are challenging the traditional banks in a key area of small business loans: faster approvals and delivery of funds.
For many small businesses, waiting up to six months for a loan approval is simply impractical. When a small business needs money urgently, a fast loan can be the difference between survival and failure. Also, business growth loans are often needed in a timely, unpredictable manner.
In the next year, small business owners can expect more financial institutions offering approvals and funding in under 48 hours.
5 Full-spectrum credit scoring being adopted
Lenders are increasingly turning to non-traditional means of targeting prospective borrowers. Full spectrum credit scoring allows for a more complete picture of potential borrowers’ ability to repay loans. It uses a wide spectrum of cutting-edge data analytics and AI findings to consider borrowers’ financial habits, such as:
- Payment of monthly bills
- Use of payday or subprime lending options
- Online borrowing
- Inventory turnover
- Overall profitability
This scoring technique aims to increase the number of borrowers while still keeping risk to a minimum. The data is combined with traditional credit reporting to produce a fairer appraisal of the consumer.
This allows lenders to open the door to borrowers who would previously have been turned down (such as millennials with no credit score). This applies to both business and consumer loans.
Full-spectrum credit scoring is set to be one of the major business lending trends to watch in 2020. It will allow small businesses to have access to more lenders who will consider your loan application, even if traditional banks have turned you down.
6 Improved customer-centric lending practices
Since the steady decline of face-to-face customer relationships in recent years, the financial services industry has been looking at ways to improve the customer experience.
Online banking is one example of how the process has become far more convenient and it’s proving extremely popular. Over 75% of Americans now use mobile apps to check their bank balance.
In this next year, an increasing customer-centric approach will mean a better borrowing experience for small businesses and more lenders competing for their business.
7 Blockchain and distributed ledger technology
Blockchain, the technology behind cryptocurrencies, is increasingly being used to offer improved financial products. Blockchain is a type of distributed ledger technology – in simple terms, a shared database of entries that must be confirmed and encrypted.
It allows financial services companies to adopt much faster, less bureaucratic banking processes, with lower costs. Blockchain technology is being developed to:
- Leverage digital assets such as cryptocurrencies to attain loans
- Track and manage loan payments
- Provide real-time transaction data
- Give borrowers more control over their loan
- Connect borrowers with private lenders
- Speed up the loan approval process
- greater access to business growth loans
8 Growth in online alternative lenders
The strict lending criteria of traditional banks and credit unions have made it all but impossible for many small business owners to get loans. This has opened the door for online alternative lenders.
Their strength is in offering loans to small businesses that have been turned down by traditional banks, for a wide range of reasons.
While their interest rates are typically higher than those of traditional banks, they do offer the following advantages:
- Loan decisions often made in minutes and money forwarded in days
- Companies accepted that have been in business as little as six months
- Annual revenue requirements as low as $50,000
- All aspects of a small business’s finances are considered, not just its credit score
- Personal rather than business guarantees can help secure a loan
- Growing availability of merchant cash advances, where loans are paid off with a percentage of your credit card income
Alternative lenders are expected to grow even more over the coming years. This will give small business owners an even better chance of acquiring the business lending they need, when they need it.
Small businesses to benefit from business lending trends in 2020
Financial institutions will be looking to focus more on their customers’ needs than their own in 2020.
Small business owners will have a wider choice of loans with better service and much faster approval times. If you’ve been thinking about growing your business, expanding your team or moving to new premises, this might be the best year to do it.