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Improve loan decisioning: 5 ways to serve small businesses better

Kate Randazzo
February 12, 2025
Read Time: 0 min
two men and woman around a desk

Are outdated processes impacting your loan decisioning?

Community financial institutions have the expertise and local ties to support small businesses, but outdated processes and risk-averse approaches often slow down their loan decisioning. Meanwhile, fintech lenders offer fast approvals, attracting small business borrowers despite high interest rates.

Here are five ways to improve small business loan decisioning while strengthening relationships with local businesses.

1. Understand and meet borrower expectations 

For community financial institutions (CFIs), small business lending presents both a challenge and an opportunity. Despite their deep-rooted connections with local businesses, many CFIs struggle to compete with fintech lenders due to slow processing times and complex underwriting processes.

In a recent webinar, Abrigo Consultant Kent Kirby highlighted key ways CFIs can enhance their loan decisioning processes to better serve small businesses. Understanding what small businesses need from a lending partner is the first step in improving loan decisioning. According to Kirby, speed is the top priority. “The average bank or credit union takes two to three weeks to process a small business loan, and fintechs take no more than 24 to 48 hours,” he said.​

Given this stark contrast, many small business owners turn to alternative lenders despite their sky-high interest rates. Kirby noted that fintech term loans can have an average APR of 27%, while lines of credit can range from 36% to 86% when factoring in fees.

Despite these costs, businesses prioritize fast access to funds, often at the expense of more favorable rates. This is a significant missed opportunity for CFIs that have lower-cost funding sources and the ability to offer better terms. By embracing automation, simplifying approval structures, and strengthening relationships with business owners, CFIs can reclaim their role as the go-to lender for small businesses in their communities.

Accelerate small business lending while retaining close relationships

See How

2. Managing, not avoiding, small business lending

A common reason banks hesitate to expand small business lending is the fear of risk. While it’s true that nearly half of small businesses fail within five years​, risk avoidance isn’t the solution. Instead, financial institutions should focus on managing risk through better loan decisioning models.

Using probability of default models and data analytics can help banks identify strong borrowers more efficiently. Kirby pointed out that fintech lenders frequently use these models to approve loans quickly.

“Fintechs aren’t asking for financials...they are strictly using behavioral models," he said.

CFIs that implement similar models can automatically approve low-risk loans, weeding out the obvious approvals and denials and allowing lenders to focus their attention on borderline cases that require deeper review​.

3. Avoid overcomplication

Many financial institutions treat small business lending like large corporate loans, adding unnecessary complexity. Small business owners don’t need shared national credit structures; they need simple, flexible loan options. Simply adding automation to an outdated process won’t solve the issue, but Kirby outlined several key strategies to help:

Separate small business lending from traditional commercial lending

  • Develop a dedicated small business team with its own approval structure.
  • Simplify small business loan underwriting criteria and eliminate unnecessary documentation.

Reduce approval layers

  • According to the FDIC, 73% of banks have at least three levels of approval for small business loans. 62% even require board approval​.
  • Removing excessive approval layers can significantly speed up loan decisioning.

Set clear risk parameters

  • Establish acceptable loss thresholds and price loans accordingly.
  • Avoid excessive collateral requirements—many small businesses lack traditional collateral but still have strong cash flow.

4. Increase transparency to build trust

Small businesses often feel like they’re sending loan applications into a “black hole,” unsure of where they stand in the approval process​. Lack of transparency leads to frustration and, ultimately, lost business. Offering straightforward products—such as term loans, lines of credit, and equipment financing—with clear terms and minimal red tape makes loan decisioning easier for both lenders and borrowers.

Financial institutions can improve the loan experience by:

  • Clearly explaining loan terms and fees upfront
  • Providing real-time status updates through digital platforms
  • Offering direct access to loan officers for questions and guidance

Better communication doesn’t just improve customer satisfaction—it also enhances trust and long-term relationships.

5. Leverage automation: smarter loan decisioning through technology

The key to faster, more efficient loan decisioning is automation. Financial institutions that still rely on manual underwriting and multi-layered approval processes are at a disadvantage.

Loan decisioning automation can:

  • Speed up loan application processing
  • Reduce human error in decision-making
  • Ensure consistency in credit evaluations
  • Free up loan officers to focus on advisory roles rather than paperwork

By leveraging loan origination technology and decisioning models, banks and credit unions can offer competitive speed while maintaining regulatory compliance​.

 

The community financial institution advantage

Despite the challenges posed by fintech lenders, community financial institutions have key advantages that can’t be easily replicated:

  • Lower-cost funding sources (e.g., deposits and CDs)
  • Personalized customer relationships
  • Stronger risk management frameworks

  • Resources and relationships through financial education

However, many of these advantages are being undermined by slow, outdated lending processes. “Fintechs are thriving on our inertia," said Kirby. "They’re winning not because they offer better products, but because they move faster. We have to stop handing them business and start leveraging the strengths we already have.”​

Consider hosting seminars and workshops on business planning and financial management, or partnering with local business incubators, universities, and economic development organizations to provide mentorship and financing guidance to small businesses. By embracing automation, simplifying loan decisioning, and actively engaging with small business owners, CFIs can compete effectively in the small business lending space—offering not just fast service, but better service.

This blog was written with the assistance of ChatGPT, an AI large language model, and was reviewed and revised by Abrigo's subject-matter expert.

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About the Author

Kate Randazzo

Content Marketing Manager
Kate Randazzo is a Content Marketing Manager at Abrigo, where she works with industry thought leaders to create digital content that helps financial institutions better serve their customers. Before joining Abrigo, Kate managed social media and produced articles for Campbell University’s quarterly magazine and other university content initiatives. She earned

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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