With today’s millennial attitude of instant gratification, businesses without on-demand apps or an online presence are struggling. We see this daily in New York City as taxis become obsolete to apps like Uber, and restaurants close when they aren’t delivering through Seamless. The technological revolution and an on-demand economy are affecting every industry, from beauty to healthcare, and even finance.
The revolution is happening, slowly but surely, in the SMB lending space. Borrower sentiment is changing as the on-demand economy permeates lower middle market businesses. It’s starting to shake up Factoring, Asset Based Lending, and Small Business Lending. Some argue that the strengths of Asset Based Lending and Factoring cannot easily be replaced through apps, technology, or software automation. However, it would be naïve to think that a trend which is disrupting most other industries will not affect ours as well.
People have experienced disrupted industries in their personal lives and have come to expect it in their business products. Attention spans are shorter and consumers expect a quick turnaround. We’ve narrowed borrower expectation to a few points:
Borrowers Value Simplicity
The most popular website in the world, Google.com, is a blank white page, a logo, and a single submit button. By contrast, the finance industry does not embody simplicity. Many lenders use word or PDF applications or outdated long online forms. Clients are asked to email scanned documents or worse yet, fax them in. The process is often herding cats for both lender and borrower. Onboarding needs to be streamlined and simplified. Information gathering should be centralized using data rooms or better yet, by leveraging APIs, which accounting software and banks have provided to hook into their systems and pull information out simply.
Borrowers Value Speed
Waiting is not in the lexicon of the next generation’s business owners. Fast casual food wasn’t fast enough, so companies like Starbucks and Chipotle let us order our coffee or burrito through an app so we don’t have to wait. Yet, it still takes 2 weeks to 3 months to close a Factoring or ABL transaction. In comparison to the average borrower’s daily life, these transactions seem frustrating and overly complicated. Corners should not be cut, however the process has to speed up if we’re going to compete against online lenders and other entrants. Information requests should be organized and streamlined, decisions need to be made quickly – without compromising the due diligence process.
Borrowers Want Frictionless Transactions
One of Uber’s early innovations was to eliminate cash and tipping for car rides. Allowing you to hop in and hop out without currency exchanging hands took some of the stress and friction out of hiring a car service. By contrast, funding for ABL and Factoring facilities is riddled with friction between invoice submission, verification, notification of accounts, BBCs, and reporting requirements. We need to invest in technology to allow for verification and notification to be automated and less invasive when required. Invoices, BBCs, and reporting requirements can be automatically pulled through APIs and third party systems that hook into bank accounts and accounting software.
Borrowers Value Great Design Over Cost
Apple showed us that they can take a commodity like the smartphone and harness it into a product so profitable that Apple is among the most successful companies in history. Consumers have shown that they’re willing to pay up for a great design and experience, as long as it is simple and intuitive. Borrowers have also shown the same sentiment - that they are willing to pay up for a loan that is easier to access, easier to manage, and quicker to implement. In an environment where rates continues to compress, this may be the silver lining and the biggest call to action our industry needs.
Certain Silicon Valley startups have already declared war on Factoring and Asset Based Lending claiming it’s a lagging and fragmented market. Other marketplace and term lenders are moving upstream to compete more directly with traditional Factors and Asset Based Lenders as an alternative. Without debating the viability of their business models, you will note that core considerations of the fastest growing new entrants are the points mentioned above.
For fast growing SMBs, Factoring and Asset Based Lending is one of the best tools they could tap for growth capital. We need to continue to innovate on the product and process to ensure it matches borrower expectations and remains the clear choice for businesses.