Fast and fair lending decisions drive equality for minority-owned businesses
In 2020, an increased focus on equality and the need to reduce discriminatory practices generated several movements to level societal playing fields and create a more inclusive way of living. Even Netflix joined in, supporting inclusivity by transferring $100 million of company holdings to Community Development Financial Institutions (CDFIs), according to CNBC.
CDFIs, and other financial institutions, such as First Women’s Bank, support minority communities by ensuring access to fairly-priced loans.
The fact that minorities are often shut out of lending opportunities is a matter of record. For example, research conducted by the Minority Business Development Agency confirmed that minority-owned small businesses are less likely to receive funding than white-owned firms.i
Since minority businesses employ 7.2 million Americans,ii an inability to access critical funding can have a significant impact on the community. And when hard times hit, women and people of color are less likely to receive funding to support wage shortages as well.
There are several reasons why minority businesses are being shut out of lending, and much of it comes down to risk. Traditional financial institutions must answer to government regulators and often their own shareholders on lending profitability and default. As a result, lending standards at many financial institutions disfavor minority populations.
One reason is the fact that minority business owners tend to have lower net worth and are less likely to own valuable assets, such as a home. Business location can also figure negatively against minority-owned borrowers. Over 90% of minority firms are located in poorer urban environments,iii according to the SBA Small Business Credit Survey, indicating higher risks when held to conventional lending standards.
CDFIs and financial institutions dedicated to the support of minorities are an important thread in the fabric of these communities, but without access to technology, may not be serving minorities with the same level of service as traditional financial institutions. It is another point of inequality, but one that can be easily remedied as CDFIs unite in the cloud.
Technology levels the playing field
Rapid access to funding is now a matter of survival for many minority-owned businesses. A
study conducted by the Global Strategy Group for Color of Change and UNIDOSUS revealed that more than half of African American and LatinX-owned businesses will need financial assistance to survive the economic effects of the COVID-19 pandemic.iv
Financing can fill gaps in cash flow during times like these, but gaining funds in a timely manner, is typically a challenge. The average time to funding for traditional lending products is measure in weeks or even months, while bills stack up and rent comes due.
Digital technologies designed to streamline lender processes solves for issues like these by improving the efficiency and rapidity of the lending process. The improvements start with straight through processing or STP. STP offers two advantages to CDFI lenders.
First, STP automates many critical workflows, reducing human touchpoints by as much as 80%.v As a result, origination times are cut by 58%, putting financing in the hands of those that need it faster.vi
Automated processes require a single source of data, so STP also provides CDFI lenders with one consistent view of the customer. The streamlined visibility provides both front and back office staff with anytime anywhere access to the most up-to-date information on the business as well as the lending lifecycle, accelerating the origination process.
Fortunately, cloud-based platforms make it simpler and easier for financial institutions to gain access to end-to-end lending products that support straight-through process and faster decision times.
Delivering out-of-the-box functionality
In simple terms, cloud-based platforms make it possible for financial institutions of all sizes to plug and play technology products that improve the lending process. The result is an out-of-the-box solution designed to handle all aspects of the lending lifecycle.
Financial institutions plug into cloud-based products via APIs. Since APIs act as a connection layer, there is no need for banks and credit unions to make significant changes to internal systems or architecture.
Once connected, the financial institution realizes the benefits of a streamlined end-to-end workflow. 30% reduction in lending times are common for new customers, allowing CDFIs to offer faster support to minority firms.vii
Digitizing the end-to-end lending process does more than offer speed, however. Better access to data makes it easier to arrive at fair credit decisions. By bringing together workflows from origination through underwriting and reporting, the banks and credit unions have access to the complete lending portfolio. This enhanced view of the lending environment makes it possible for financial institutions to easily configure financial ratios and enable assessments that more accurately represent minority communities, while also protecting bank profitability.
With greater efficiency and faster credit decisioning, lenders can support greater loan volumes as well. Financial institutions have grown loan volume by 12% without the need to increase hiring. Keeping overhead low allows CDFIs to put more funding back into the community.
For CDFIs and other financial institutions dedicated to serving minority communities, technology is leveling the playing field and creating a more inclusive environment for banks and credit unions of all size to support underserved markets.
i “Executive Summary—Disparities in Capital Access between Minority and Non-Minority Business.” Minority Business Development Agency U.S. Department of Commerce. Retrieved from https://archive.mbda.gov/page/executive-summary-disparities-capital-access-between-minority-and-non-minority-businesses.html.
ii “Presidential Proclamation on Minority Enterprise Development Week, 2019.” Minority Business Development Agency U.S. Department of Commerce, Sep. 10, 2019.Web.
iii “Alicia Robb, Ph.D., et al. “Minority-Owned Employer Businesses and Their Credit Market Experiences in 2017.” U.S. Small Business Administration Office of Advocacy, Jul. 22, 2020. Web.
iv “Federal Stimulus Survey Findings.” Global Strategy Group for Color of Change and UNIDOSUS, 2020. Web.
v “Using a Straight-Through Processing Model Can Boost Loan Quality and Reduce Origination Costs.” Mortgage Orb, Mar. 26, 2015. Web.
vi “Optimize End-to-End Commercial Loan Originations with Fusion CreditQuest.” Finastra. Retrieved from https://www.finastra.com/sites/default/files/2019-06/infographic-optimize-end-to-end-commercial-loan-originations-fusion-creditquest.pdf.
vii “Optimize End-to-End Commercial Loan Originations with Fusion CreditQuest.” Finastra. Retrieved from https://www.finastra.com/sites/default/files/2019-06/infographic-optimize-end-to-end-commercial-loan-originations-fusion-creditquest.pdf.