The big business of small business lending: Why the human touch matters
Make no mistake: Competition for small businesses is heating up among big banks, credit unions, alternative lenders and every institution in between.
Small business owners now field a barrage of ads, direct mail pitches and sales calls that promise fast funding access. The competition then heats up when you add these ingredients: low interest rates, business investors seeking better returns, tightened lending standards among traditional banks, and consolidation between community banks. Now, throw this into the stew: turbocharged growth among peer-to-peer and lenders.
Some larger banks are even acquiring FinTech lenders to transform the small business loan process. The goals include reduced paperwork and processing time that traditional lending methods require. It’s all about making small business loans quick and easier to access.
But this budding partnership with FinTechs may not present the best option for banks that hope to gain more small business customers, as this type of financing lacks flexibility and endurance to spur long-term growth.
A recent nationwide small business credit survey by the Federal Reserve gives reason for pause. The survey found that successful small business credit applicants were significantly less satisfied with online lenders. The net satisfaction rate? Just 27 percent, compared to 75 percent for small banks and credit unions. Large banks fell in the middle.
Granted: Alternative lenders boast an edge in processing and turnaround times and stand out for their engaging online platforms. But this trendy, tech-heavy approach needs to be weighed against what alternative lenders lack in terms of customer relationships and long-term funding solutions—the hallmarks of commercial finance.
Short term, peer-to-peer loans often provide a stopgap when small business owners face cash flow problems or rising overhead. But in many situations, this financing only provides a temporary fix, not a lasting solution. Cash flow needs, an expanding employee base and growth capital can and do change drastically over time.
Nor is peer-to-peer without its tradeoffs. In exchange for quick funding and less stringent requirements, small businesses must pony up significant collateral—and accept higher interest rates and add-on fees. If the borrower then seeks additional working capital, they may face problems and fail to adjust in making ends meet. What’s more, traditional banks may turn away the borrower due to the risks created by these quick online loans.
By contrast, small business owners who turn to a commercial finance firm, as with a bank, often seek a personalized solution that fits their business—long term. Besides providing term loans to decrease prior debts and increase liquidity, commercial firms use alternative funding facilities, such as accounts receivable factoring or asset-based financing, to meet the ongoing needs of their clients. Value-added benefits streamline back-office accounting processes and this allows owners to spend more time and resources to grow their business instead of chase customer payments. Some commercial finance firms may also allow a quicker financing turnaround to meet the timelines of cash-strapped small business clients.
The peer-to-peer and online lending spaces have already made traditional banks and commercial lenders reevaluate how they take products to market. And that’s a good thing: It sharpens their game as they build their effectiveness online and offline. The online space lacks customer focus and falls flat in fostering the relationships small business owners want to foster a forward-thinking approach.
Nor do many peer-to-peer and online lenders staff up to engage small business customers and provide solutions tailored to their needs. Most will not even know of the industry where the company operates. That reveals a gaping flaw. Small businesses don’t want to be pushed through service centers when they need urgent assistance. Rather, owners often seek a personal touch where funders double as trusted advisors.
Commercial finance firms stand out in this regard. They maintain that type of solid personal relationship with small business clients and support the entire business lifecycle. Thus they fill a critical gap in the “relationship-based financing” continuum for businesses unable to access bank financing. To that end, these firms and traditional banks build and strengthen a natural partnership.
Every business is unique. A one-size-fits-all approach rarely meets the changing dynamics of a small business. Banks should thus consider partnering with a commercial finance firm that can customize funding solutions and provide a solid understanding of the small business space. It requires a human connection: a live person who can talk through the nuances of a business to understand its customers, payment terms and challenges.
Yes, FinTech startups in the peer-to-peer lending space have gained in popularity. In a speedy high-tech world, they provide fast funding and an online approach. But they also lack the years of experience commercial finance firms have in advising small businesses and cultivating relationships of trust.
Some crucial facets of the lending space cannot be measured in bytes and data points. That is: Online lenders may save time, but commercial finance relationships are timeless—and it takes more than an algorithm to match the human rhythm.
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Ian Watson is chief executive officer of North America at Bibby Financial Services, which specializes in small-business funding needs and has more than 30 years experience in banking and finance. Previously, Ian served as Bibby’s CEO of the Asia-Pacific region.