Small Business Lending Is Crucial in Fighting the Deposit Wars

The right talent and tools can equip bankers to take advantage of opportunities in the small business market.

As bankers continue to fight the deposit wars, they must move past the polite talk and build a true go-to-market plan to capture the lucrative U.S. small business market—a segment of 32 million small-to-medium businesses (small businesses) with less than $10 million in annual revenue with funding needs of loans between $5,000 and $1,500,000.

Currently, these businesses are finding funding sources such as Small Business Administration loans, equipment financing loans, or other lines of credit from fintechs and niche players in the market like American Express, PayPal, Mercury, Blue Vine and OnDeck.

For bankers to be successful in the small business lending market, they need to execute on several key tenets: strategy, people, process and technology.

Strategy: Choose Your Niche

Making the most of an investment in business services requires a strategic approach. No two markets are created equal. Community banks need to analyze the demographics and varied business segments to identify the growth potential of each market. They should seek out “white space” opportunities, those underserved segments such as start-ups focused on sectors like health-care professionals, cash-oriented businesses, and small-to-medium businesses that are not actively pursued by large national banks. Niche players can disrupt established financial services market share with new offerings and unique ways to offer a more personalized relationship than the large players can provide.

People: Employ the Whole Team

Cornerstone recently conducted “boots on the ground” interviews with 30 community banks and found that responsibility for small business lending varied from institution to institution with some leaving it up to the branches and others assigning relationship managers to named accounts.

Although most community banks formally assign relationship managers to their large dollar commercial loan portfolios as these loans are usually large dollar amounts, successful small business banks take this discipline down to relationship managers to borrowers with loans of $100,000 and up while fully automating the process for loans less than $100,000. While maintaining a portfolio of at least $10 million in loans, these relationship managers are also responsible for sourcing at least $1 million in new loan activity per month and funding the bulk of this loan volume with relationship core deposits.

Another key player for successful small business banks is the vice president of business lending, who manages the relationship managers and reports to the chief lending officer. This individual is also responsible for pricing loans and understanding the competition. Since fintechs are the primary competition for community banks in this space, the VP of business lending needs to pay special attention to this segment. American Express’ Kabbage loan rates range from 18% to 120% annually on outstanding balances, and Lending Club charges a 5% origination fee, so there is plenty of room to make money. 

Process and Technology: Lower Costs, Speed Up Decisions, Comply with Regulations and Source Leads

To make small business activity profitable, community banks need to keep the cost of origination down compared to more time-intensive commercial lending. Streamlined approaches to underwriting and verifications also need to be addressed as small business owners are less likely to have all the documentation on hand that larger commercial clients will have such as business tax returns, income statements and balance sheets.

According to Cornerstone analysis, roughly 50% of U.S. community banks have automated their commercial loan origination systems. Even fewer banks have deployed automation for small businesses. Fortunately, banks are beginning to drive more automation with small business decisioning engines, which require fewer data points than the complex spreading tools involved in commercial lending. Many small business owners have only a few bank statements and a personal credit score for their bank to consider. Embracing a streamlined lending strategy is critical for successful small business lenders to compete with the fintechs that typically have loans decisioned and funded in 24 to 48 hours.

The challenge for community bankers is to match the experience of the challenger banks and fintechs that are utilizing technology to differentiate. The most successful lenders deploy the right technology to enable:

• Prequalification of small business borrowers;
• Digital application experience;
• Digital identity verification, KYC and beneficial ownership capabilities;
• Auto-decisioning by analyzing bank transactions and cash-flow calculations;
• Documentation creation and electronic signing; and
• Core account boarding.

One of the hardest components of successful small business lending is identifying and targeting potential customers. A simple way to gain confidence and volume in small business lending is to review existing small business owners who already have deposit relationships with the institution and prequalify these account holders for loans under $250,000. This generates an instant book of leads for branches and business lenders to conduct follow-ups. Finally, to source leads of small business owners outside of the current customer base, data-driven automation must be employed as word-of-mouth relationship efforts simply do not drive the necessary business volume.

Many community bank executives cite small business lending as a top priority, but few have developed the strategy, people, process and technology to successfully engage this market of over 32 million potential customers. Those that have are leveraging smarter prospecting and lead generation, loan application technology, loan decisioning engines and document management to capitalize on nearly $80 billion in additional loans utilized by the small business segment in the United States.

It’s time for more bankers to recognize the opportunity and deploy the talent and tools that will empower them to take advantage of this market.

John Meyer is a senior director at Cornerstone Advisors. Follow John on LinkedIn.