Challenges with B2B Lending

B2B lenders face a plethora of challenges, hindering seamless SMB lending. One of the biggest hurdles is the inability to assess small business risk and avoid fraudulent activity. Pre-COVID, a fintech’s risk assessment model consisted of credit data created during periods of stable economic scenarios.

Such a gap between what’s real and predicted has led to millions in losses for fintech and other B2B lending startups. Moreover, finding the right leads to pitch loan products requires lenders to access quality data on the business’s creditworthiness. However, the credit information vendor market is highly unorganized and fragmented, meaning there is no single source of information or truth to meet rapidly increasing data needs.

Traditional data collection processes add no relief to existing challenges. As banks use manual, antiquated methods to collect data, there is always the risk of data entry errors and duplication.

Moreover, the credit assessment processes are seldom transparent, consisting of ad-hoc benchmarking and no systematic calculation of a single score that incorporates the business and owner’s criteria.

MSMEs often have incomplete or unreported financials, limiting their ability to produce adequate documentation for legal purposes. Due to disparate systems, approval tracking is lengthy and challenging, and auditability is poor. Manual processes make tracking payments and collections difficult, with no system to automatically send out reminders and notifications to borrowers.

On top of this, as data is captured across disintegrated systems, accessing meaningful insights or tracking any early warning signs of default is challenging.

Emerging Trends in B2B MSME Lending

As discussed above, micro, small, and mid-size enterprises are looking for easier access to loans amid shrinking funding and not-so-easy-to-navigate guidelines of traditional banks.  

Moreover, as traditional banks find it challenging to buoy margins in a low-interest economy, MSMEs are slowly turning to alternate sources of financing like NBFCs and fintechs. Consequently,  the financial services industry consists of multi-product banks and fintechs offering specialized products to niche groups.

Regarding B2B lending for MSMEs, creating reliable credit risk assessment models to validate credit decisions and avoid default becomes a significant challenge due to the lack of data. Consequently, embracing new tools and data sources for data gathering and modeling will be one of the emerging trends in B2B MSME lending. However, this shall warrant new rules for data and which data are allowable for specific services to balance consumer privacy, control, and financial inclusion.

To tide over various challenges, the MSME lending landscape has undergone severe disruption, poised to completely transform with what is known as “digital lending.”

Digital Lending for the MSME B2B Segment

Digital lending is all set to revolutionize B2B lending. As per reports, the digital lending market size is expected to grow 4.75X to $1.3 Tn in 2030 from $270 Bn in 2022.

With the growth in fintech and the proliferation of formal finance, digital lending is set to account for 60% of the total Indian fintech market by 2030.

India’s maturing tech stack, specifically the Unified Payments Interface (UPI) rise, 85% total MSME smartphone adoption, 95% drop in data costs, and 8-fold increase in MSME data consumption, has driven the significant rise in digital lending trends.

Not to forget mentioning India Stack, a set of four technology layers that have enabled India’s digital finance revolution -

• presenceless layer (Aadhaar for identity verification),
• paperless layer (eKYC, eSign, DigiLocker),
• cashless layer (UPI, AEPS), and
• consent layer (free, open, and secure movement of data).

India Stack has significantly impacted the country's digitization levels, specifically in the financial services sector.

Digital lending can address challenges in sourcing credit and underwriting and financing loans, including lack of transparency, long processing times, documentation formalities, etc.

The key is digitizing the customer's digital lending journey and generating a more accurate picture of the borrower’s creditworthiness. In short, B2B lenders must streamline, organize, and automate the collection of borrower information, including verification data, entity data, financial data, and fraud check information. Additionally, extensive data analysis can help uncover deeper insights from external data such as online company reviews, internet and social media behaviour, web presence, alternative risk scores, etc.

Banks and financial institutions must implement rules-based decision-making, automate credit underwriting, and fast-track yes or no loan decisions to reduce time-to-money and hasten loan approvals and disbursements.

Moreover, integrated cloud-based platforms can provide a single solution for managing entire credit life cycles, removing duplicate tasks, updating information automatically, and implementing data structures that make data ready for analysis.

Lending risk can be managed and eased up extensively with digitalization. Work with Thence to digitalize your processes now. Get in touch.

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