Business loan

Is the business loan broker model dying and will it be replaced by algorithms?

Russell jeffrey

08:59, 11 May 2021

5 minutes to read

Contribution from Jook Marketing

SMEs remain one of the most underserved customer segments by large banks, and the tumultuous nature of the past year has seen the appetite for bank lending to small businesses decline even further.

The Advisor has already reported on the opportunities this could present for business loan brokers who seek to upgrade their staff in order to better serve SMEs.

Peter White, Managing Director of the Finance Brokers Association of Australia, explained: “Many business owners are unaware of the significant increase in fintech and non-bank lenders, but unless financial brokers understand this market. – and that includes the ability to understand business accounting practices – our industry will not be able to take full advantage of it.

It is therefore important for business loan brokers to better understand both the non-bank lending options available to SMEs and the individual nature of an SME’s financial statements which will differ from those of large organizations.

Traditional credit guidelines set by banks can often lead to rejection of loan applications from SMEs, but this is not necessarily the case for non-bank lenders. Small business lender OnDeck recently announced a new risk-predictive credit model which she believes should support a more appropriate risk assessment for lending to SMEs, especially newer businesses and those that may not have substantial data volumes.

As business loan brokers seek to expand their offering to SMEs, this comes amid heightened competition from the rise of a new generation of business loan matchmakers known as the business loan market. These free algorithmic tools analyze information entered by potential borrowers in a quest to find the best business loan for small businesses. Provide a role almost identical to that of a business loan broker.

The success of the algorithm depends on the data it is provided – the more information a potential borrower can enter, the more likely they are to find a suitable lender with a greater chance of approving a small business loan. By entering certain basic information including the industry in which they operate, the company’s turnover and synchronizing their bank accounts, a business loan market can make an informed decision as to the most suitable lender for. a business and the amount to be requested. .

With absolutely no loans to small businesses, business loan markets see themselves as technology companies that can help SMEs get the financing they need fast. So, as business loan brokers seek to improve their knowledge of cash flow for SMEs and non-bank lenders, machine-driven AI is already fulfilling this function.

Can an algorithm provide better service than a business loan broker? Much would depend on the quality of the loan broker and the quality of the AI ​​that was programmed, but it’s not necessarily the right question to ask anyway. Do they offer a service closer to the requirements of an SME? Without doubt, yes.

With a business loan marketplace, an application can be completed entirely online and only takes a few minutes. The services are generally completely free. Time-sensitive SMEs will surely love the idea of ​​real-time results and the ability to refine their search for small business loans at no additional cost. Working with a business loan broker will almost certainly cost the borrower more.

Whether processed by a machine or a credit analyst, the loan is also a largely data-driven decision anyway. The data will ultimately determine whether credit should be extended and the risk factor involved, which in turn will directly correlate with borrowing costs. The key is to understand that SME data can be more limited and that is not necessarily a reason to reject an application.

A business loan marketplace will analyze a borrower’s bank transaction data (rather than rigid credit guidelines regarding financial statements with banks), so it is also closely aligned with the lending process that a non-bank lender is likely to lead as well. And while business loan brokers try to expand their network of non-bank lenders, business lending markets have used relationships with non-bank lenders as the foundation of their technology platforms. In fact, most business loan marketplaces only work with other business loan providers. While some, such as Valiant Finance, include largely alternative lenders, but with a handful of traditional banks to boot., on highest rated small business loan marketplace by is one of several business loan markets that have been launched in Australia in recent years. The results of their proprietary data analysis will show SMEs how much they can borrow, their chances of getting approved, and which lenders to go to. All via a visual and easy-to-assimilate loan dashboard.

The long-term outlook for business loan brokers in the SME sector will depend on how brokers respond to the threat posed by business loan markets and the extent to which algorithms developed by loan markets can be improved. Algorithmic loan analysis is already proving to be faster and more efficient than human manual labor. As these develop, their effectiveness is also likely to improve – by adjusting their effectiveness to match potential borrowers with the most suitable lender for their needs.

Is the business loan broker model dying and will it be replaced by algorithms?

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Last updated: May 25, 2021

Posted: May 11, 2021

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