While the country enjoys unprecedented levels of small business optimism, access to credit will either boost or curtail economic growth within this high-impact sector, according to a new study. Gimme Credit: Faster, Simpler, Safer Credit for Main Street America, explores factors contributing to small businesses’ access to credit, and proposes lending best practices that will boost economic output of these companies.

The study is a joint effort from PayNet, the leading provider of small business credit data and analysis, and Raddon, a provider of innovative research, insightful analysis and strategic guidance to financial institutions.

The Good News: Small Business Confidence Surges

Small businesses are on an upward trajectory, according to the study:

• Anticipated small business loan demand is at its highest level since 2012, with 48 percent planning to take out a loan in the next 12 months;
• Nearly two-thirds of small businesses (65 percent) anticipate an increase in sales, compared to just 5 percent that expect a decrease; and
• Small business economic confidence ratings outpace those of consumers by more than two times (43 percent versus 21 percent).

“Small businesses are in full-on growth mode,” said PayNet President William Phelan. “They’re looking to banking partners for reasonable capital infusions, but are discouraged by slow reviews, impersonal processes and denials. This creates a huge opportunity for nimble community banks, credit unions, and alternative lenders to fill the void.”

The Downside: A Small Business Credit Gap is Slowing Economic Recovery

According to a Harvard study, following the 2008 financial crisis, a combination of regulatory and risk factors lowered credit volume among larger financial institutions, hampering the pace of recovery. The lingering effects of these factors continue to hamper small business growth today.

“It’s a recurring cycle,” said Bill Handel, Chief Economist, Raddon. “Cumbersome underwriting practices increase the likelihood that lenders are either unwilling or unable to extend favorable terms to small businesses, which in turn discourages applications. Fortunately, lenders can take steps to improve their efficiency and profitability in this area. If localized or niche lenders are able to foster improvements in their local markets, it will in turn fuel the broader economy.”

The study outlines three specific steps lenders of all sizes can take to improve automation, achieve faster decision-making and reduce the lending cost curve:

1. Segment applications by loan request size and reviews by loan risk profile
2. Deploy technology to assist in preparing applications, collecting data, and analyzing the business/loan
3. Optimize procedures by leveraging industry intelligence to improve their “decision engines”

The report notes lenders employing these best practices stand to gain market share as the economy expands. In particular, new technology-based lenders have made strides to reach this underserved market, although they may struggle with higher marketing costs and weak local connections. This trend bears watching for mainline financial institutions in particular, as barriers to create a propensity for small businesses to look to alternative lenders.

An executive summary of the report is available at Raddon.com.