Geopolitical movements, technology advancements and sociological changes are all deeply affecting the direction commercial lending is moving in. As commercial lending is directly impacted by the economy, it’s hard to predict exactly what will happen as we move further into 2024, but we can reflect on what has already been happening.
Below we dive into the top commercial lending trends that are making a splash today and will continue to do so tomorrow. Understanding the market is the best way for lenders to remain agile and be able to adapt their business practices as necessary.
1. Tightened Lending Standards and the Shift toward Alternative Financing
As much of the world struggles in uncertain economic times, private commercial lenders are actually in a favorable position. When interest rates are really high, banks often lose their appetite for taking the risk that the borrower won’t pay back the loan. These days, increasing capital requirements and fundamental credit concerns are also presenting challenges. In response, banks have been tightening their lending standards and looking to offload riskier loans to independent and specialty lenders. This has triggered a movement within lending – one away from banks and toward alternative sources of capital.
Alternative financing offers businesses various channels to access funding and capital with perks such as lower costs, enhanced flexibility and a simplified loan approval process. Asset-based lending, factoring and receivables financing are among the popular options that have emerged for non-traditional finance systems.2. Boost in Alternative Lending Platforms
The loan process used to be quite simple where a borrower would go into their local bank and submit an application. This is no longer how it’s done. Not only do people want to do it digitally, but they also want options. With the rise in non-bank financing, more lending platforms and peer-to-peer (P2P) platforms are popping up, offering more flexibility compared to traditional banks.
The commercial loan software market is projected to reach $23.2 billion by 2030, up from $12.1 billion in 2022, registering a compound annual growth rate (CAGR) of 8.60% (according to Contrive Datum Insights Pvt Ltd).
3. Heightened Integration of Artificial Intelligence
Technological advancements have had a particularly large impact on commercial lending as they have transformed what used to be a very paper-intensive, tedious and manual process riddled with slow decision times and inefficiencies. More and more companies are exploring the possibilities with automation to cut costs and increase efficiency. Artificial intelligence (AI) is one way in which companies are able to achieve advanced automation capabilities.
AI is growing to where it has the potential to help make far better and faster use of data than other technologies and free up time and resources. In commercial lending, AI is helping to identify patterns, detect anomalies and predict the creditworthiness of borrowers. This technology enables commercial lenders to make more informed decisions, mitigating risks and optimizing their portfolios.
4. Sustainable and Socially Responsible Lending
There is an uptick in companies leaning in to green lending, socially responsible financing and environmentally friendly project financing. This is in response to demands from society and the government for such initiatives.
Commercial lenders will increasingly be weaving Environmental, Social and Governance (ESG) criteria into their decisions, using reporting for greater transparency. It’s anticipated more funding will be given to environmentally sustainable projects, that’s how important it’s becoming.
5. Personalized Customer Experience
Customers demand a personalized experience these days to a point where the experience is sometimes more important than the product or service itself. Banks and lenders will increasingly rely on powerful data analytics––including through the use of AI––to offer personalized products to borrowers.
AI algorithms can analyze historical data and individual borrower profiles to generate customized loan options, including amounts, repayment terms and interest rates, that align with the specific requirements and financial capabilities of each business. This leads to greater chances of loan approval––and faster approval––plus a happier, more engaged customer.
6. Regulatory Requirements
Regulatory requirements keep getting more stringent. Many states have adopted regulatory requirements and required disclosures, which put pressure on all lenders to comply. Commercial lenders need to ensure they stay up-to-date and comply with disclosures accordingly or risk hefty penalties. Automating disclosures can lower risk and help commercial lenders more easily manage compliance.
Staying On Top of Commercial Lending Trends
In 2023, the commercial loan market in the U.S. alone was estimated to total $2.77 trillion. With the growing demand comes changes in market needs as well. Decipher Credit’s sophisticated and comprehensive loan decisioning platform helps lenders remain nimble and meet the evolving requirements of their day-to-day jobs as well as their customers. Our solution streamlines origination, underwriting and onboarding, saving both lenders and borrowers time.
As the state of affairs is ever-changing, check back in on our blog where we’ll continue to share up-to-date market assessments to keep you informed.
