Why SMB Lenders Need Straight Through Data

Securing bank financing for a small business (SMB) is neither fast nor easy, but the people running those SMBs need it to be both. For financial institutions (FIs), too, it’s in the bank’s best interest to move the process along.

However, the business lending process is bogged down with manual paperwork that can take as long as 25 hours for SMBs to prepare and submit. The package must include the laundry list of financial records lenders want to review: balance sheets and financial statements, bank statements, tax returns, accounts payable and receivable and details about the vendors on those lists, as well as details about outstanding loans and tax returns.

Once those 25 hours have been invested and documents are printed out and sent to the lender, the tedium of the process shifts to the lender. Rooms filled with people take those documents and start to spread them, entering them into their own proprietary systems. On a good day, getting from document drop-off to decision can take 35 or 40 days to complete – and it’s not unheard of for a loan decision to take more than 120 days. Sometimes the process takes so long the financial information gets stale and it’s back to the manual document drawing boards.

Steven Brennan, SVP of lending at Validis, told Karen Webster in a digital discussion that data-driven speed and simplicity for SMB lending must become a best practice rather than a competitive differentiator for FIs. Efficiency benefits not only their SMB customers, but also the banks themselves, he said. Better data, faster, means better decisions faster, too.

That’s why a group of forensic accountants set out to found Validis. Accountants are on the front lines working with SMBs to keep their financial houses in order, using one of the market’s many accounting packets to help them manage and update their financial information easily and efficiently. The notion that SMBs and their accountants had to print out all the stuff they had neatly assembled online seemed nuts to them.

So, they decided it was time for a change: a data extraction platform, Brennan said, built by accountants and bankers – for accountants, bankers and the SMBs who need and work with both.

From Days to Seconds

Brennan believes SMBs will continue turning to traditional FIs for business loans, at least as a first recourse. Banks must therefore figure out a way to connect with customers the way those customers want to connect, or someone else will do it instead.

Data – and the application programming interfaces (APIs) that enable easy access to it, he explained – is the tool of choice for that.

Brennan explained that, when an SMB requests a loan, Validis lets FIs plug directly into the SMB’s accounting systems, whether the business does its bookkeeping with Sage, QuickBooks, Xero or another platform. By allowing access to their books, SMBs save themselves all those hours of gathering paperwork into a package to submit to the bank.

When a prospective borrower approaches a lender, he said, Validis (via the bank) sends a link to a form. The customer enters his information and returns the form. From there, data can be downloaded and analyzed for accuracy, then placed into a standardized set of reports.

Validis, Brennan explained, is connected to all the accounting platforms, so regardless of which one an SMB is using, the information it contains can be translated into a universal format that is easier for banks to use. This enables the FI to bypass all of that cumbersome rekeying and jump right into the analysis phase.

The bank now has full transparency into that SMB’s financials, from ledgers to accounts payable and receivable. Beyond that, Validis also drills into who is at the other end of those payables and receivables, generating an extra level of data to help the bank make a decision.

Meanwhile, because FIs can white-label the solution, customers see only the bank with which they have a relationship, said Brennan – and the whole process only requires about 60 seconds of effort from the customer.

Data in Context

Brennan said that more complete financials can transform an FI’s lending process and facilitate better business relationships. That can be achieved simply by loosening its hold on institutional data and allowing an outside party like Validis to access the ledger.

With such direct visibility, said Brennan, the company is free to spend its time suggesting additional products, cross-selling, upselling, offering guidance, or identifying at-risk businesses that could jeopardize the bank’s investment and relationship with that borrower – rather than rekeying financials and year-end statements in a paper-driven process.

But to reap the greatest benefits, the data must also be put into context. Brennan said that can be difficult when banks are so defensive of their data, effectively keeping it in a credit silo where others in the institution, such as sales and loan teams, can’t access it.

“Our process is anti-silo,” Brennan said. “We want data moving freely. Today, banks must play well with others to be competitive.”

Brennan contends that standardized reporting across the customer base puts data in a useful context. Even if only half of the customer base allows direct data access versus submitting financials the old-fashioned way, Brennan said it frees up Validis to fulfill more of a consultancy role and take relationships with banks to the next level.

Data Is a Bank’s Best Friend

Access to data can help across the portfolio of a commercial lending operation as a bank endeavors to serve an SMB.

Alternative lenders are already connecting straight to SMBs’ accounting packages, said Brennan – and as other players in the space recognize this as the next step in the loan origination evolution process, the practice is starting to go mainstream.

Furthermore, accurate data can help banks and their customers manage the challenging areas of credit and risk by revealing where they may or may not be complying with regulations, Brennan said.

Finally, timely and accurate data can contribute to proactive portfolio management. An SMB that is struggling is focused on keeping its head above water, said Brennan, and may not be submitting financials as it should. Pulling that data directly gives the FI insight into that SMB’s problems and creates an opportunity to address the situation before it gets worse.

Brennan noted that identifying those struggling SMBs is at the core of Validis’ value proposition.

“My job is to find the needle in the haystack that needs attention,” he said. “The main complaint we hear from banks is that everything is paper, everything is manual rekeying. There are too many FedEx envelopes and not enough data.”

That, he added, frees up time and resources to focus on building relationships – and starting new ones with more of the six million-plus SMBs out there today.

It Will Happen – Not If, But When

Over the years, Brennan noted, consumers have taken their banking needs from branches to smartphones, today scanning their own checks and tapping their phones to pay. Yet even today, SMBs lack access to such technologies on a business-to-business (B2B) scale.

Banks have not been quick to embrace past innovation, said Brennan, but today, those innovations have become table stakes – as data-driven efficiencies in SMB lending also must, he noted.

“We’ve seen that banks that embrace mobile and online have succeeded, and now we are back at that point with data,” Brennan said. “The cloud didn’t happen overnight, and neither did digital banking. It takes time to become mainstream and that’s where we’re at in the marketplace. The early adopters are in. It’s saving banks in many areas and keeping customers happy. The rest are beginning to follow.”