Community banks have been historically important for small business funding. If small business owners need funding, they are likely to find community banks that are more willing to help them out. According to the Independent Community Bankers of America (ICBA), community banks provide over 60% of small business loans in the United States.

However, the past couple of years have led to an abrupt increase in small business loan applications, and community banks are struggling to cope with the demand. The Paycheck Protection Program filled American pockets with extra cash, combined with the “Great Resignation,” has led to many searching for more fulfilling entrepreneurial ventures. In addition, inflation has triggered many business owners to look for support from their financial institution.

As a result, community banks need to update their strategies to manage demand for small business loan applications. What should they focus on?

Modernize the loan process: Small business lending needs to become more efficient, modern and user-friendly, especially in an uncertain economic environment. Customers want digital banking experiences similar to navigating the website of their favorite e-tailer and, in the case of small businesses, they also have the expectations of their end customers to satisfy. Small businesses need more flexibility, shorter lead times and less paperwork, as well as smooth access to other banking services such as payments, cash management and advisory services. Unfortunately, many community banks are far from delivering this type of experience.

Fully automated technologies, like a single loan platform, can help reduce friction for borrowers and increase efficiencies, while keeping up with digital demands. Such a tool can break down lending silos, eliminate paper-based processes and reduce overhead, while strengthening borrower interactions and communication between internal departments. This can put money into the hands of borrowers faster.

Diversify your loan portfolio: Diversifying the loan portfolio is also important for boosting efficiencies, managing risks and maximizing returns. A diversified portfolio allows banks to enhance asset quality, resilience and performance, while minimizing risks and reducing the need for external financing. Many community banks have a diverse investment portfolio but fall short when it comes to their loan portfolios, leading to concentrations in areas like industry, asset size, geography or business type.

Digital platforms for loan trading, selling and participation can help community banks get unbiased access to loan opportunities in a transparent and efficient way. Many financial institutions have a specialty or niche in their market but are unable to fully satisfy the credit need due to concentration restrictions. Digital platforms can help community banks increase liquidity and manage the portfolio that aligns with the institution’s growth plans while simultaneously funding a need within their communities.

Become trusted advisors: Small businesses search for personal relationships with their bankers, and relationships are something community banks do better than anyone. But these enterprises also need advice – not only during the funding process, but throughout the lifecycle of their business. For example, they might struggle to manage the loan, need help dealing with cost pressures or want investment advice.

With modern technologies taking over manually intensive tasks, bankers will be able to spend more time with their customers, which is required to become truly trusted advisors. Small business owners may feel more comfortable knowing they have someone to go to with financing needs, which stands to increase customer loyalty, boost retention rates and attract prospects. Moreover, by having an in-depth knowledge of the account, bankers will be positioned to cross-sell relevant products that help maximize the bank’s return on investment (ROI) and deepen the share-of-wallet customers hold at the bank.

Lending by community banks has, for the most part, remained unchanged for decades. To compete with the convenient and intuitive options delivered by fintechs and cope with current demand, community banks need to update their strategies and processes.

Gary Lewis is managing director for lending and deposit solutions at Jack Henry & Associates.