Strategy First for Small Business Lending
One the most famous phrases in U.S. Supreme Court history comes from Justice Potter Stewart’s concurring opinion in a controversial 1960s case. “I know it when I see it” is his now infamous threshold for obscenity.
In some respects, this is how banks approach small business. They have a vague idea of what they’re talking about, but nobody in the industry really has an agreed-upon definition. The Small Business Association, for instance, defines a small business as an independent business having fewer than 500 employees. By this measure, there were 28.2 million small businesses in 2011, the latest data available.
But the SBA definition isn’t exclusively used by banks to categorize small business. A top 100 bank, for example, might consider a borrower a small business if its needs are under $1 million. Yet to a community bank, a $1 million loan is a pretty sizable underwriting opportunity and it’s likely to be lumped with larger lending initiatives.
You’re probably well aware how much competition exists today for small business customers. You can read about it and hear about it almost everywhere you turn. Every bank seems to say they are focusing on small business lending and there’s a plethora of alternative lenders dipping their toes into the market as well. Meanwhile, there are only so many small businesses that banks will even consider lending to. So where does that leave the majority of banks? In many cases, the answer is: floundering.
Many banks think they have a strategy for tackling the small business market. But saying you want to increase your small business loans by, say, 5% a year isn’t a strategy – it’s a task. And not a well-defined one either.
With so much competition, the only way to be successful is to have a small business banking strategy that enables you to clearly define and measure your success. For the most part, big banks do a good job of this by dividing lending into several silos. One 400-person unit, for instance, might be dedicated solely to lending to doctors, dentist and veterinarians. Another lending division might concentrate only on technology companies.
Regional and community banks, however, are limited by the number of lenders they have. If you only have 30 lenders, it is nearly impossible to be all things to all people and do a good job of it. That’s why it’s so important for smaller and mid-size banks to try to hone in on their target market and work at it. It doesn’t matter that your reach is smaller than large-bank competitors; it just matters that you have a well-defined strategy and you follow it.
Say, your bank wants to focus its lending on SBA-qualified loans. You first have to understand how to become approved by the SBA. You also have to understand the guidelines for advertising your participation in the program and how to reach out to businesses in your area that might qualify for these loans. Then you have to make a plan on how to go after those loans and see them through to fruition.
We recently worked with a regional bank in the mid-Atlantic region that was well-steeped in commercial real estate lending. The bank then decided it wanted to develop a commercial and industrial (C&I) loan business and we helped analyze the market to determine what businesses were located within a certain number of square miles from their branches. After all, it would have made no sense for the bank to build out a commercial loan business in mostly residential locations. Yet, many banks don’t take the time to focus on these details, and as a result, their ability to grow their lending business suffers.
Another mistake we see banks make is to branch out into other markets when they haven’t yet fully mastered the ones they are already in. Success in a market should be measured by a combination of factors including growth, profitability and margins. But it’s also how much penetration you have in your market. Are you the bank customers turn to when they need X or Y type of loan? If you haven’t already saturated the market you’re in, don’t waste your time trying to expand elsewhere. There’s more work to be done right at home.
Whatever type of lending your bank is trying to do – whether SBA, C&I, residential mortgage or something else – your success will be based upon how good your strategy is. First define it. Then measure it. If you have the wrong focus, the wrong people and the wrong systems, you’re only shooting yourself in the foot.