At the close of 2013, the Thomson Reuters/PayNet Small Business Lending Index (SBLI) reached its highest point in seven years. The SBLI has proven to be a strongly correlated indicator of GDP by up to five months in some cases since small businesses traditionally are more adept at responding to economic conditions than their larger business counterparts. This growth is wonderful news to banks that have not only been hit by stagnant deposits in recent years, but have also been challenged to generate new commercial activity while sustaining profitable and high performing loan portfolios.
Regardless of the seemingly improving commercial opportunity, banks still need to challenge their traditional train of thought around small business lending. Working with a small business to provide a commercial loan product is not the end game. Instead, there is too much additional potential for interaction being lost in nurturing these small businesses while at the same time growing and maturing those relationships to enable that customer to become more profitable for the bank.
Supporting Cash Flow
Bankers do have options for implementing an alternative commercial lending strategy and approach. Tighter risk measures and stricter guidelines leave many banks still hesitant to fully commit to commercial real estate loans at the same volume of five or so years ago. However, consider that small businesses are always looking for capital financing, short and longer term, to fund their basic operational needs. Supporting ongoing cash flow is what they need to ultimately fuel their own sustainability and then achieve any future growth.
Banks should explore small businesses’ needs for cash to purchase equipment, update systems and facilities, hiring and more. Interestingly, companies in their infancy as well as more established businesses are potential customers. Particularly within niche markets, perhaps indicated by geographic or industry factors, banks have low-hanging fruit to target their outreach. Institutions in the Midwest, Southwest and select Northeast areas are naturally suited for high growth in the energy sector as the boom in oil and natural gas drilling feeds supplementary industries. Healthcare is experiencing double-digit growth annually and is expected to continue this trajectory. Trucking and manufacturing are enjoying regional booms with more national, wider spread impact pending.
Banks are also troubled with the delinquency rate for loan repayments across small businesses averaging 180 days as these entities are struggling to pay back monthly loan payments on time. For some businesses and entrepreneurs who are not as skilled or experienced as required for growth, banks can be more than just a lender – they can build ecosystems of advisors. Consider, for example, Live Oak Bank out of Wilmington, N.C. The $427 million institution has brought experts into the bank across certain business specialties to help advise small business customers on everything from operations and cash flow to marketing and other aspects of running their day-to-day business. Interestingly, the delinquency rate on Live Oak’s portfolio of small business loans (SBA 7(a) products) is only 1%. And by the way, the bank’s small business portfolio is third in size only behind Wells Fargo and U.S. Bank.
Banks can be successful now in their small business relationships for several reasons. For one, economic growth will continue to create demands for goods and services. Sustained growth, albeit slow, always fuels loan demand. Money is also strong in equity markets and has been moving up the chain into major niche markets and for much larger deals. And don’t forget that small businesses have fewer options for funding beyond friends and family. This opens more opportunity for banks, particularly community institutions, to step in and fill the void.
If bankers can overcome their limited view of how small businesses can be served, they will discover that offering alternative financing options, niche markets and expanded commercial services will provide immediate and long-term revenue opportunities. Pursuing these endeavors with your institution’s basic knowledge of sound lending principles, small business guidelines and overall economic awareness can be a responsible and profitable venture.
Ms. McHugh is SBA product manager for Wilmington, N.C.-based nCino. She may be reached at firstname.lastname@example.org.