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How to speed up underwriting for small business loans

Mary Ellen Biery
August 2, 2024
0 min read

Loan decisioning allows small business lending to grow

Community financial institutions can leverage automated loan underwriting to increase small business lending and achieve consistency.  

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What is loan decisioning technology?

Loan decisioning technology is software that helps financial institutions evaluate loan applications faster and more consistently by applying predefined credit criteria, workflows, thresholds, and approval rules. In small business lending, it can automate parts of the underwriting process.

Market trend

How do you make small business loans worth the underwriting?

After the success community banks and credit unions had helping businesses in their local communities with lending during the pandemic, financial institutions continue to turn to small business loans as a source of portfolio growth.

Since small business (SMB) loans often carry smaller balances than larger commercial loans, lenders need an efficient origination process that makes SMB loans a more financially attractive undertaking. In many institutions, a $50,000 loan goes through essentially the same underwriting process as a $5,000,000 loan, and when that’s true, the cost to originate the small loan may outweigh the benefit.

Furthermore, given the rise of fintech firms chasing the SMB segment, borrowers have alternative sources of funding. That adds to the pressure on financial institutions to innovate the small business loan process. In a recent Aite-Novarica report titled Aite Matrix: Commercial Loan Origination Automation, the author notes that customer demands for a digital experience are currently one of the top market trends in banking. “Used to the simplicity and speed of services such as Uber, Spotify, and Amazon, principals, and decision-makers of banks’ commercial borrowers have long sought similar levels of convenience when conducting borrowing transactions,” noted the author.

When a credit union or bank sends every small business loan through a traditional underwriting process, it delays both the "yes" and the "no" answers -- and neither situation is good for the customer.

Neil LeCorgne, current CEO of Scottsdale Community Bank, wrote in a whitepaper on automated loan underwriting that responding quickly to a prospective borrower is vital. "In many institutions, weaker loan applications are either ignored or batted around the institution for excessive time periods without resolution or feedback to the borrower," he wrote. "This is obviously not in the best interests of the borrower or the institution.

Investing excess time and resources in a traditional underwriting process for loans destined for declination is inefficient and increases the potential for compliance risk. 

The good news is that by investing in a streamlined origination process, community banks and credit unions can target SMB loans profitably without adding unknown credit risk to the portfolio.

“By incorporating automation and workflow management to map the path of various loan applications based on their strength, financial institutions can focus resources on applications that warrant more analysis and evaluation so they can ensure any loan approvals will meet institutional risk and return objectives,” LeCorgne wrote. 

Technology can help expedite several steps in the process of underwriting for small business loans, such as:

  1. Data collection: Modern underwriting platforms integrate data from various sources, including financial statements, tax returns, and market analysis, to provide a holistic view of a business’s financial health.

  2. Loan decisioning: Automated decisioning systems use predefined criteria to approve or reject loan applications quickly. These systems can flag applications for further human review when necessary, ensuring that complex cases receive the appropriate level of scrutiny.

  3. Compliance and risk management: Technology ensures that underwriting processes comply with regulatory requirements by incorporating compliance checks into the workflow. This reduces the risk of non-compliance and potential penalties.

Loan decisioning software provides specific templates for different loan types, so data-entry screens, calculations, and decisioning rules are customized to the institution’s loan policy creating a more streamlined process. For smaller exposure SMB loans, this technology allows the institution to quickly screen loans and identify applications that should be approved, rejected, or reviewed further through a comprehensive spread and global analysis.

That means small business loans that have little chance of approval can be quickly dispensed, and the strongest SMB loan applications may have an expedited approval process. 

Target SMB loans

How do you streamline small business lending?

With loan decisioning an institution can efficiently allocate credit analysts’ time to the credits that need more attention, bringing the cost of originating smaller loans down where possible.

Win more small business deals: Watch this webinar on Building a data-driven lending strategy

In other words, the automated loan underwriting allows the bank or credit union to serve business owners' needs while meeting institution risk and return objectives. The time savings also enable lenders to respond to applicants more swiftly, improving customer satisfaction and operational efficiency.

The technology also prepares lenders to scale: with the faster process, the lenders can process more applications in the same amount of time. The quick turnaround time and scalability make growth objectives more achievable for institutions seeking growth.

Configuration

How small business lending automation impacts thresholding

Some institutions may rightly have reservations with automated decisioning, a technology that uses thresholds to systematically approve or reject loans, as it removes the human judgment of credit analysis. A good origination solution, however, will give the institution flexibility in set-up that still achieves consistency, which regulators and loan review firms will appreciate.

Thresholding in small business lending refers to setting specific financial criteria or benchmarks that applicants must meet to qualify for a loan. These criteria are used to evaluate the risk associated with lending to a particular business. Common thresholds include minimum credit scores, debt-to-income ratios, and revenue levels. By establishing these thresholds, lenders can ensure that only applicants who meet the minimum standards for financial stability and repayment capability are considered for loans, which helps manage risk and improve the efficiency of the lending process.

The automated small business loan underwriting solution will:

  • Configure the thresholds used in decisioning
  • Configure the metrics or ratios used to determine thresholds
  • Flag loans for more review rather than using binary decisioning (yes or no)
  • Develop templates for different loan types, exposures, etc.
  • Manage approvals, so Chief Credit Officers or senior lenders have to approve loans above certain balances

When configured to the institution’s needs, loan decisioning software can equip the institution to more proactively and profitably target small business loans.

Loan decisioning technology can also be part of a more comprehensive integrated solution for lending. It may also use predictive scoring – similar to a probability of default model – to quantify a forward-looking assessment of credit risk objectively.

Takeaway 1

Financial institutions will continue to drive growth through small business lending.

Takeaway 2

Financial institutions can use loan decisioning to direct credit analysts’ time toward profitable small business lending.

Takeaway 3

Financial institutions can configure an automated underwriting and origination solution to fit their processes and produce consistent decisions

Looking to grow small business lending?
Check out this guide with strategies for credit unions.

Keep me informed Download the guide

FAQs

What is loan decisioning technology in small business lending?

Loan decisioning technology is software that evaluates small business loan applications using predefined credit criteria, approval rules, thresholds, and workflows. It can automate routine underwriting steps, identify applications that qualify for expedited decisions, and route more complex or higher-risk requests to a credit professional for additional analysis.

Why can small business loans be costly for financial institutions to underwrite?

Small business loans can be costly to underwrite because lower-balance requests may require many of the same manual steps as much larger commercial loans. When a $50,000 loan follows essentially the same process as a $5 million loan, the time and personnel costs associated with origination may outweigh the expected financial return.

How does automated loan underwriting improve decision speed?

Automated loan underwriting improves decision speed by collecting relevant financial data, applying established credit rules, and routing applications based on their strength or complexity. Strong applications may move through an expedited process, clearly ineligible requests can be resolved sooner, and exceptions can be directed to credit analysts for further review.

Does automated loan decisioning replace human credit judgment?

Automated loan decisioning does not have to replace human credit judgment. A properly configured process can make straightforward decisions using established criteria while flagging exceptions, larger exposures, or complex applications for manual analysis and approval by credit officers or senior lenders.

What is thresholding in small business loan underwriting?

Thresholding is the practice of setting financial criteria that applicants must meet before a loan can be approved or advanced through the underwriting process. Common thresholds may include credit scores, financial ratios, revenue levels, exposure amounts, or other measures defined in the financial institution’s loan policy.

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About the Author

Mary Ellen Biery

Senior Strategist & Content Manager
Mary Ellen Biery is Senior Strategist & Content Manager at Abrigo, where she works with advisors and other experts to develop whitepapers, original research, and other resources that help financial institutions drive growth and manage risk. A former equities reporter for Dow Jones Newswires whose work has been published in

Full Bio

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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