Determined to shore up portfolios, most major banks today are eschewing small business loans in favor of providing business credit cards to entrepreneurs. In their place, for-profit and nonprofit microlenders continue to fill the financing gap for small businesses in need of seed funding, according to a report from the Wall Street Journal.
The report echoed other recent accounts of the rising interest in microlending in the United States, notable because this form of funding was initially more popular in developing countries. However, tight credit restrictions have urged small business owners to seek loans from microlenders, which often offer smaller loans than what would be expected from a traditional bank.
For larger banks, it can be more cost-effective to engage small business owners in a line of credit, as loan processing for smaller financial extensions may not be as fiscally worthwhile for these institutions.
“You can’t afford to spend the man-hours in traditional underwriting for a $50,000 loan that you can for a $2 million loan,” Fred Crispen, an executive at one microlending firm, told the source.
However, microlenders can afford to make these loans, as many are funded through federal grants offered by the Small Business Administration.
It’s a game of give and take for traditional and alternative banks alike, with each having to assess risk to determine which products would be the most profitable for their business. Risk management software can play an important part in this process, arming institutions with the tools needed to determine the value of a small business credit card option or a lending program for entrepreneurs.
Ultimately, a risk management framework backed by sophisticated credit application processing capabilities may be a bank’s most valuable asset in the effort to strengthen client portfolios and uncover new financing opportunities in a rapidly changing economic landscape.
