Alternative lenders differ from banks in that they have no depository, checking or savings account balances, mortgage payments or other forms of significant cash flow. Their growth path relies on one goal: to lend more. Many alternative lenders have impressive loan volume, but most would experience challenges in scaling their current systems, processes and people to handle a surge in applications without ballooning overhead costs or increased headcount.

Efficient growth is still possible despite these challenges.

Customers are available — particularly, small businesses transitioning to the next phase of recovery. Plus, scaling can happen without incurring crushing overhead costs, but it involves a renewed commitment to digital transformation. And while there isn't a one-size-fits-all approach, there are key factors to consider when boosting digital capabilities.

Step 1: Examine the landscape for opportunities.

Alternative lenders don't have already-existing customers — there's no such thing. To successfully gain customers, they need a clear acquisition plan. A lender needs to show investors it can acquire customers, and then actually do it.

Fortunately, one segment of the marketplace has greater capital needs than ever: small businesses. Even before the COVID-19 crisis put small businesses in a cash crunch, data indicated this segment needed more capital because of sharp growth over the past several years. As of January 2020, there were 5.1 million small to medium-sized businesses (SMBs) in the U.S. And that number was growing by about 4% per year, according to a November 2019 Accenture report.

But as the SMB category has grown, individual businesses' access to credit has not kept pace.

According to the Federal Reserve, in 2019, 53% of the small businesses that sought capital received less funding than they wanted, and another 29% were left with unmet funding needs. Traditional banks were increasingly less likely to be viewed as the default solution. Less than half of small businesses obtained funds from a bank within the past five years, while 22% received funding from online lenders in 2020.

Demand is there and growing, but lenders must be equipped to meet it. That means scaling quickly and overcoming compounding overhead.

Step 2: Innovate or die. Commit to digital transformation.

Growth isn't as simple as making more loans — it's an infrastructure and process commitment.

Disbursing loans through the traditional paperwork and manual process requires human capital — that's a lot of time and cost investment. But, as businesses have increasingly welcomed online solutions, and COVID-19 necessitated a shift to digital, now is the perfect time for lenders to seize the power of technology and automation for improved customer service, faster loan processing, greater transparency and reduced costs.

It's assumed alternative lenders must be technologically savvy, especially compared to traditional community banks. But that's not necessarily true. Aside from being "online shops" without brick-and-mortar storefronts, the vast majority of alternative lenders — especially those struggling to scale and meet demand — lag in adopting modern technology and struggle with disparate systems.

Digital-first organizations like PayPal and Stripe are equipped to address business needs almost immediately. Their contactless, streamlined, and lightning-fast approach is perfectly tailored to this moment. For alternative lenders, competitive pressure isn't coming from just banks, but from other alternative lenders and digital giants with user-friendly processes.

A smooth digital process has become a cost of entry for alternative lenders in today's market.

Step 3: Choose the right digital solution.

If COVID-19 taught us anything, it is that pencil-and-paper processing simply can't sustain a business. It doesn't work for the lender or the small-business owner facing an urgent need.

For alternative lenders looking to capitalize on existing demand and keep pace with digital-first competitors, there are four crucial functions they must include in their digital solution:

Multiplatform access. Small-business owners, like the rest of us, have grown accustomed to accomplishing many of their business tasks from the kitchen table, in the car or out for a walk. Lenders must accommodate customers who want to originate a loan from a desktop, tablet or mobile device — meeting customers where they are.

SMB-specific credit criteria. Without processes tailored specifically to SMB lending, the bar for creditworthiness becomes too high for many small businesses that could be valuable customers. A comprehensive, data-driven digital solution offers the flexibility and precision needed to assess small businesses by the most accurate determinants of creditworthiness for their sector. For the lender, this means being able to tap into real-time cash flow.

Automation. A robust solution will allow a lender to automate as little or as much of the process as they would like, making every decision theirs — automated or not. Application scoring, bidirectional communication, offer presentations and e-contracts can be automated. Automation also delivers the customization and service that customers expect.

Product structure and payment methods. With greater automation, a lender can deliver multiple loan offers at a time, in real time, and enable applicants to select their desired term, price and loan amount based on predetermined parameters. Digitized monitoring means greater ease and scale without sacrificing compliance.

With the right small-business lending solution and greater automation capabilities, alternative lenders can be equipped to fund more small businesses in a fraction of the time that it once took— scaling even through a challenging climate.