The financial crisis of the late 2000s sparked a change in the small-business lending market that is continuing to this day. Traditional banks, where many people get their commercial mortgages, became more cautious by implementing stricter eligibility requirements and reducing access to capital for small businesses. This gap in the market has since been filled by nonbank lenders that have shifted the competitive landscape away from legacy institutions.
Commercial mortgage brokers will find opportunity in this lending evolution by partnering with nimble, aggressive and tech-centric nonbanks that aim to continue growing their market share. This burgeoning sector, with its digital platforms and fast online processing systems, can help mortgage brokers become part of this changing world of small-business banking.
A 2020 report from New York University’s Stern School of Business, titled “The Rise of Finance Companies and FinTech Lenders in Small Business Lending” noted that between 2010 and 2016, nonbank lenders expanded their annual lending activities at much higher rates than traditional banks. Today, it appears that nonbank lenders are continuing to take market share from traditional banks.
In fact, nonbank lenders were responsible for more than 68% of all mortgages originated in 2020, according to Inside Mortgage Finance. Nonbanks also have made an impact on the small-business lending sector, which has tended to be underserved by traditional banks. In many ways, nonbank lenders are evolving at a faster pace than traditional banks to meet the financial-services needs of small businesses.
Focus on innovation
Free from many of the traditions and regulations that bind legacy institutions, nonbank lenders are often more innovative and entrepreneurial. For instance, nonbanks are meeting small-business expectations for digital-first approaches and faster, more personalized experiences that many banks and credit unions are not able to do on a large scale. Furthermore, as banks tend to be risk averse, nonbanks are more willing to customize loan experiences to meet the needs of small businesses.
Nonbanks are embracing new technology to help speed up funding requests — for example, through the use of online tools to streamline paperwork and enhance loan processing tasks. To better understand their clients, they are implementing advanced data analytics. These steps are helping nonbanks evolve to meet small-business expectations and utilize technological innovations to stay on the cutting edge of the lending world.
When the Paycheck Protection Program (PPP) was launched in 2020 to help reduce the impact of the COVID-19 pandemic, PayPal, Intuit and Square were among the fintech companies allowed to help quickly distribute proceeds from the U.S. Small Business Administration (SBA). There also were many SBA-approved nonbank lending firms that implemented new digital procedures to quickly analyze and approve loan requests. Thinking on their feet and embracing innovation, these nonbanks were able to distribute billions in relief funding and facilitate small-business borrowing that helped many companies survive difficult times.
The one-size-fits-all approach to business lending is popular with many large banks but has proven awkward in recent years. Instead of trying to appeal to every potential client, nonbank lenders tend to specialize in areas where they have experience. While a community bank may process a dozen loans for small businesses in a year, a specialized nonbank lender may process hundreds of these exact types of small-business loans, thus developing a level of base knowledge that is required for getting the best deal possible for the borrower.
Over time, a nonbank lender will alter its processes for efficiency in this space, evolving along with loan requirements. The tendency of nonbanks to focus on niche product offerings means that they will know exactly what documents a small business will need to bring to the table and can offer advice on creating a stronger loan application.
Free from many of the traditions and regulations that bind legacy institutions, nonbank lenders are often more innovative and entrepreneurial.
This isn’t always the case with traditional banks. The 2018 J.D. Power U.S. Small Business Banking Satisfaction Study found that banks are not doing a good job of meeting the needs of small businesses. Only 32% of small-business banking clients that were surveyed said their bank understands their business.
Beyond loans, nonbanks also are known for high-quality customer service. When a nonbank lender has a smaller client pool along with a deep understanding of the process, borrowers and brokers tend to report better service experiences.
Fast and personal
Online companies have helped consumers to expect a new level of personalized attention. According to a 2020 survey from Salesforce, 80% of customers now consider the experience a company provides to be as important as its products and services. The survey also found that 68% of customers expect brands to demonstrate empathy.
This demand for personalization is one of the reasons that small businesses and entrepreneurs are moving to nonbanks. In today’s economy, there is less need for a uniform lending process. Nonbanks are using technology to gain insights that allow them to deliver more personalized service to small-business clients. They also are supplying the banking services their clients need, including specialized loans that many banks aren’t likely to consider.
Living in the era of two-day shipping has meant that small businesses are reliant on fast service. Many banking institutions, however, are having difficulties delivering on this demand for speed in such areas as commercial mortgage lending, which can take months.
For instance, according to online financial marketplace Fundera, the SBA loan process generally takes about 60 to 90 days. Instead of waiting weeks or even months for a bank loan or a government-backed loan to be processed, borrowers and brokers who work with nonbank lenders often are able to have their loan applications processed in much less time, thanks in part to the use of new technology that accelerates the approval and funding processes.
The ability to receive a loan quickly is critical to many small businesses. So, it makes sense that the time involved in the approval and closing processes may be a decisive factor for where small-business owners choose to apply for a loan.
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Today, nonbanks continue to expand their commercial mortgage business by capturing more market share from traditional banks and by delivering on client expectations in many areas, including innovation and personalization. Overall, expect to see nonbanks continue taking market share from traditional commercial lenders while expanding their innovative practices and product lines. As the rest of the world digitizes and demands more of these services, this evolution in nonbank lending will continue to reflect society at large. ●
Christopher Hurn is the founder and CEO of Fountainhead Commercial Capital, an industry-leading, national nonbank lender founded in February 2015 by some of the most experienced and awarded small-business lenders in the U.S. The company specializes in SBA 504 loans and low loan-to-value commercial real estate loans, ranging from $200,000 to $20 million. Having literally written the book on SBA 504 loans, Hurn loves sharing the benefits of the program with all owners of small to midsized businesses.
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