Financial institutions have long been wary about lending to small companies – the conventional thinking is that the risks tend to outweigh the profits. Over the last few years, however, the small-business community and fintech upstarts have begun to form relationships that have helped lead some lenders to reassess the market’s potential.
One example worth noting involves Farm Bureau Bank, headquartered in Sparks, Nev. In searching for ways to reengage its large affinity community, the $769 million bank expanded into small-business lending – specifically loans and lines of credit under $250,000.
In the first month, Farm Bureau Bank assisted three small-business clients in acquiring loans and lines of credit between $5,000 and $250,000. This amount is a sweet spot for small businesses looking for quick cash-flow options for payroll, inventory or other short-term needs.
In the second month, the bank’s volume of small-business financing more than doubled using only light marketing promotions sent to existing business customers in Colorado and Arizona. After applications, offers, and acceptances nearly doubled again in the third month in the small-business space, the bank began to understand the growth potential.
These are exciting figures for an institution offering limited small-business products with relatively little marketing. Within a short period of time, Farm Bureau Bank has connected with its business customer base in a fresh, new way and has begun paving a new path for growth in 2020.
Small borrowers face big obstacles
In the past, the small-business niche has posed a challenge to the average community bank because most institutions use the same underwriting system to process $5,000 loans and $5 million loans. Under this structure, it makes sense to prioritize applications based on profitability.
According to the Federal Reserve’s most recent small business credit survey, firms seeking loans between $100,000 and $250,000 felt shortcomings in funding access most acutely. Outdated practices such as extensive paper applications, long decision times, poor record-keeping and inadequate performance analytics often hamper the lending process.
For those financial institutions focusing on the small-business sector, success in the early stages has been the result of engaged senior leadership, a coordinated strategy with cross-functional teams and active communication and feedback in consistent intervals.
And success can come quickly. For example, Belton, Mo.-based RG Federal Credit Union, serving the greater Kansas City area, is a consumer credit union new to the small-business space. It closed its first loan less than a week after its product launch, in August, with no marketing. This speedy result was encouraging, given that the lender had not expected to see traction in this channel until early 2020.
Freedom Bank, headquartered in Fairfax, Va., wanted a platform that would allow them to attract new customers with appropriately structured loan products funded into a Freedom Bank deposit account that customers could self-manage. Now it can provide its customers with options for unsecured lines of credit and loans faster while being more competitive. The bank can provide instant pre-approvals and funding typically within 24 hours after credit approval.
Consumer-centric financial institutions are recognizing the growth potential within the small-business segment. Small enterprise processes, at most financial institutions, are routinely under-engaged and poorly organized, therefore difficult to improve in short periods.
It is estimated that an average of 15 percent of consumer bank accounts at any institution are small business owners, and institutions can further engage this demographic by introducing commercial products suitable to their needs.
Deeper relationships have the potential to pay off in terms of longer-term loyalty. According to BAI Banking Outlook research in 2019, nearly half of small businesses say they plan to direct all of their future deposits to their main financial services provider, while close to 40 percent say they will do the same for merchant services and a third of them intend to deal exclusively with their main bank when it comes to loans.
Over time, we would expect more banks to expand into the small-business sector by leveraging best-in-class technologies that are easy to implement and execute, and that operate with little to no risk to the core financial operations.
Brendon Dibella is chief commercial officer for Reston, Virginia-based StreetShares, a firm that helps financial institutions provide small business loans.
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