External funding is an essential lifeline for many small businesses across the U.S. Although the demand for financing is high, considering that most SMBs fail as start-ups because of running out of capital, the lending statistics tell a different story.

According to the Small Business Credit Survey, only 34% of small companies sought financing in 2021. Meanwhile, more than half of the 66% of non-applicants needed funding but opted not to apply anyway. The businesses that needed funding but did not apply cited the following factors as the main reasons why they felt discouraged from seeking funds:

• Weak business financials
• Strict lending requirements
• Feeling unworthy of financing
• Lingering disappointment from previously failed applications
• Missing or incomplete documentation

It turns out that despite needing cash, even with business survival on the line, many SMB entrepreneurs would rather take their chances with bootstrapping than approach lenders.

Here's your chance to truly make a difference. Well-established businesses can help solve this problem by providing better ways for small businesses to get funded. Your business can essentially become a B2B lender overnight; you just have to create a business financing product. But for that to work, your offer must really appeal to small businesses. And that's what this article is all about. Read on and learn how to design a new business lending offer that attracts serious borrowers from small business communities.

What do SMB owners look for in a funding product?

That’s the 7.8 trillion-dollar question. What features and terms attract small business owners to a financing product? It’s essential to understand what an ideal funding offer looks like from the borrower’s perspective when venturing into the world of small business financing. Learning this should give you a template on which to base your offering in order to draw in the right audience.

The fastest way to identify key borrower preferences is by researching the various financing products popular with small businesses. You'll probably find the best financing solutions for SMBs have the following features:

• Easy application process, usually done by filling out a short and simple online form.
• Minimal lending requirements; collateral, cosigner, and high credit score may not be needed.
• Short wait time for credit decision, approval, and funding — some applications are approved and even funded within the same day.
• Relatively low costs (interest + fees).
• Business-friendly repayment terms such as low or well-spaced-out installments.

Five tips for designing a business lending product for SMBs

Based on what we’ve learned about borrower preferences when it comes to SMB financing, here are five useful tips for developing a B2B lending solution suitable for small businesses:

Focus on the loan features

Deciding the loan features is the most important part of developing a lending product. A typical small business loan has four core features you must attend to. These are tenor, rate, installment, and limit.

• Tenor – Refers to the loan period or term. Short-term loans are typically repaid in under two years, while long-term loans can stretch to 25 years. The tenor is mainly determined by the loan amount.
• Rate – This is the interest, usually given as an annual percentage rate (APR). Naturally, a lower APR is more attractive to borrowers. But you must also consider industry benchmarks, lending risks, and profitability when setting the rate. Using the SBA funding programs as the baseline, you’re looking at an average rate of between 5.75% and 13%.
• Installment – Defines how frequently the borrower pays down the loan and how much they pay each time. This must align with the borrower’s income cycle, the loan amount, and the tenor.
• Limit– Refers to the maximum loan amount. Presently, the average small business loan amount is about $650,000. However, the limit heavily depends on the loan type and associated risks.

Provide multiple borrowing options

The small business financing market is incredibly diverse. Besides conventional loans, borrowers have a vast array of funding solutions at their disposal, including merchant cash advances, business credit cards, asset financing, lines of credit, and invoice factoring.

For one reason or another, a borrower might prefer a particular funding mode over others. Also, some entrepreneurs like a diverse credit mix because it helps them manage their debt load and cash flow. So, offering just one funding product can greatly limit your market scope. Diversify your offering by providing either multiple variations of the same product or a few entirely different financing options.

Look beyond the typical qualifying criteria

Some lenders, especially large banks and credit unions, set the bar too high for SMBs wanting financing. Needless to say, strict qualifying requirements discourage many cash-strapped entrepreneurs from applying for funding. Furthermore, some popular qualifying criteria are not so good at gauging an SMB's creditworthiness in the first place.

Admittedly, most small businesses may not have a good credit score, high sales figures, high-value assets for collateral, or a long operating history. But even so, it doesn’t mean they’re not good for the money. The irony is that all the reasons that motivate small business owners to seek financing are the same reasons that many lenders use as grounds for disapproval.

Be different. Employ more inclusive and considerate criteria for gauging a borrower’s creditworthiness. Ditch the traditional qualifying checklist and assess each business individually. For instance, evaluate the lending risk based on how the borrower intends to spend the money, their venture’s feasibility, and the people behind the enterprise.

Speed up the underwriting and disbursement processes

Speed is a critical factor in business financing. Most borrowers don’t have the patience to wait around for weeks or days to hear back from a lender. In fact, some borrowers want the cash right there and then, and they know they can get it.

This doesn’t mean you should approve and disburse funds as soon as an application comes in. However, you should at least remove any unnecessary obstacles and delays in the underwriting and disbursement processes. Allow yourself enough time to assess the borrower and go through all the various checkpoints, but try not to keep them waiting too long. Ideally, the whole process should wrap up within 24 hours or three working days max.

Optimize your offering with a co-branded lending partner

Developing a financial service that attracts small business owners through its low cost, high value, and ease of access is a big challenge, especially for first-time lenders. But actually, the hardest part is balancing all those selling points against profitability, competitiveness, and risk management. And after all that nerve-racking work, you’re still left with the tasks of marketing the new offering and engaging with potential borrowers.

Luckily, a co-branded partner such as Loanspark can help you to quickly develop and sell a new lending product. We have teams of vastly experienced financial experts and a state-of-the-art loan origination system that can take your lending initiative from just an idea to a lucrative business financing opportunity in record time. Our Business-Lending-as-a-Service (BLaaS) will mold your brand into the best SMB lender by optimizing its financial offering for maximum customer retention, market competitiveness, safety, and returns.

Best of all, you will be helping businesses in need while making a profit. The way it works, you’ll actually make money through referral fees by partnering with Loanspark.‍

Contact us to learn more about bringing a successful SMB lending service to market via a co-branded partnership.