Approaching SME Finance Like Personal Finance

With greater confidence in the U.S. economy and small business confidence in the current presidential administration, alternative lending is yet again at a crossroads. The latest Biz2Credit Small Biz Lending Index revealed, for the seventh month in a row, that large U.S. banks increased their loan approval rates to SMEs in February, with approval rates hitting 24.1 percent.

That’s still below the approval rates seen at alternative and marketplace lenders, though, with Biz2Credit pegging that statistic at 58.4 percent. Despite approving most of the loan applications received on their platforms, alternative lenders have dropped those approval rates. It’s a sign, Biz2Credit said, of alt-lenders struggling to keep their competitive edge over traditional banks that are finally implementing better technologies.

According to Nonso Maduka, head of small business at NerdWallet, part of the problem is that small businesses are more familiar with traditional banks.

“Many small business owners continue to use their network of friends, family and business contacts to get advice and referrals,” the executive recently told PYMNTS. “So if an owner has a business checking account at a local or national bank, you could imagine that he or she would check out available financing options there. This is primarily happening offline, so there is still an awareness gap about the growing alternative lending space.”

It’s in this context that NerdWallet, primarily known for its personal finance services, has augmented its SME financing offerings, most recently by adding Bond Street into NerdWallet’s Small Business Loan Tool, which links SMEs to a variety of lenders on its platform.

As awareness continues to grow, Maduka noted that boosting the ease with which SMEs can access a loan, combined with competitive rates, can help alt lending continue to gain traction. When zoomed out, the competition over small business lending comes down to understanding the borrower. Big banks have found themselves struggling to gain a positive reputation with SMEs or to be able to offer personal finance or large corporate solutions, while SMEs fall somewhere in the middle.

According to Maduka, SMEs are closer to the individual on the financial services spectrum.

“We think about small business finance and personal finance very similarly,” he said. “The underlying issue is that, whether you’re looking to find the best credit cards, insurance, loans or investing, consumers lack the clear, unbiased information they need to make the best financial services. For consumers who are looking to start a small business or expand, they’re faced with the same problems.”

Maduka added that a small business owner’s personal finances will be a critical factor for a financial service provider when considering a loan.

But that doesn’t mean an SME owner’s personal experiences in finance will be able to carry them through the process of operating a company. Maduka said it can be “a big learning curve” for these firms.

“Often,” he said, “small business owners will overestimate sales and demand, which in some cases means having too much inventory on hand. Another mistake is not properly planning for emergency expense, or not preparing for seasonality.”

Cash flow can also be hampered by managing (or mismanaging) accounts receivable and unpaid invoices, the executive continued, adding that this situation gave rise to the invoice financing and factoring startups amid the alt-lending boom.

Being able to target the specific challenges of a small business — like managing unpaid invoices — will be critical to financial service providers cracking the SME code. Big banks seem to be increasing their ability to do so, according to the latest data. But Maduka suggests that personal finance players like NerdWallet can, too, by taking the path of the marketplace lender.