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Leveraging automated underwriting software for SMB lending

Mary Ellen Biery
February 24, 2022
Read Time: 0 min

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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Market trend

Small business lending is a focus

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.

A recent survey conducted by Abrigo indicated that 89% of institutions planned to increase small business lending efforts in 2022. Many credit unions are looking to begin or expand member business lending programs, and recent inflation has prompted small businesses to seek new lines of funding.  

Since small business (SMB) loans often carry smaller balances and may be less profitable for the financial institution than larger commercial loans, lenders need an efficient origination process that makes SMB loans a more attractive undertaking. In many cases, 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. 

Streamline the process

Loan decisioning is here to stay

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. 

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. 

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.

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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 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.


SMB lending underwriting flexibility

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. 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.

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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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