As in payments, small business (SMB) lending has seen a heightened demand for speed — faster application processes, underwriting, decision-making and payouts. While it may be a trend impacting many alternative finance products and, increasingly, traditional bank lending practices, speed isn’t necessarily for everyone in this market.
Asset-based finance, a product that has seen steady growth in volume over the years in the U.S., has experienced its boost from economic confidence and historically low default rates, according to research from the Commercial Finance Association. While this type of SMB financing is experiencing industry changes on several fronts, acceleration isn’t one of them, nor does it necessarily need to be, said Michael Finkelstein, CEO and founder of The Credit Junction.
That is especially true for businesses of a certain breed, like the larger SMBs that operate within supply chains, including manufacturers, distributors and suppliers. As the asset-based financing market begins to stretch into the SMB market, Finkelstein recently told PYMNTS that he’s witnessed business owners preferring financiers to take their time.
“Businesses say they really appreciate the time taken to learn about the business, to come out and visit, to take a walk-through of inventory, to take a trip to the factory,” he said, adding that in asset-based financing, the underwriting process isn’t just about mitigating risk, but about developing a relationship with the borrower.
Since financing is issued via credit line, rather than a fixed-term loan, that relationship between SMB and financier can last much longer than a relationship with other financial service (FinServ) providers. For the companies that The Credit Junction serves (B2B businesses on the larger end of the SMB spectrum that are, on average, 12 years old), business owners are not expecting to be able to access $3 million in a single day.
“We blend traditional asset-based lending techniques, where we go out to a site and spend time with the CFO or controller to understand their history and operating rhythm, and craft the right loan product,” Finkelstein explained. “They’re traditional businesses in which a handshake matters.”
Recognizing the importance of fostering a relationship between SMB borrower and financier serves as a reminder for the quickly changing (and accelerating) small business financial services space, including lending and banking: Speed is often critical, but, in some cases, business owners prefer to take the time to build a relationship with a FinServ provider. Similar trends are seen in the traditional banking space. A recent survey from J.D. Power found that bank account managers can be key to building a relationship with SMB clients seeking advisory services from their providers, suggesting business owners are often willing to pick up the phone or visit a physical branch to meet with a human.
Finkelstein noted that, for The Credit Junction, the underwriting process can take up to three weeks with a single person assigned to each underwriting case. This “human” side of the asset-based financing process may be key, but it’s not the only way to mitigate risk and boost customer satisfaction.
Indeed, asset-based financing hasn’t entirely been left out of the technological progress that other financing products have experienced. Data analytics is becoming an increasingly critical part of customer management, Finkelstein noted — and yes, this is one area in which speed is certainly important. Real-time visibility and analytics into existing borrowers’ operations and finances is key to maintaining that relationship, he said, and assessing a business’ future need for financing.
In addition, since these borrowers are rooted within complex supply chains, facing longer payment terms from their corporate borrowers and often struggling to align their cash cycles, real-time data has become an even more critical component of the asset-based financing process.
“It’s the cash-to-cash cycle. If a company has to buy inventory for their factory, or [if] they’re putting 30 percent down to get goods shipped from overseas, the time it takes for that investment in inventory to translate into receivables — and [to get] paid on those receivables as bigger businesses are pushing out those terms — puts an immediate cash strain on growth-oriented businesses,” Finkelstein said.
The ability for an asset-based financier to maintain an ongoing relationship with a borrower, have a deeper understanding of their financials, and obtain heightened transparency over the long-term has this industry ready to participate in another trend that is increasingly common in the small business financing space. According to Finkelstein, there is a significant opportunity to commercialize the data analytics side of The Credit Junction business, and partner with third-party FinTech firms and traditional financiers that are in need of similar solutions for their own SMB clients.
With a recently announced $23 million equity investment from Century Equity Partners, The Credit Junction will have the opportunity to explore progress in this area, as well as in data integration and adoption of technologies that can empower data analytics capabilities, like machine learning and artificial intelligence.