Committees : Lending

Why Does Small Business Lending Cost So Much?

Nearly every community in America has small businesses and community banks that strive to meet their needs. So why do so many small businesses turn to financing sources outside their community?

One major reason is that current processes at most community banks are expensive, restrictive and clunky for both bankers and business owners. But all of this can be changed, and far more easily than bankers might expect.

Most small business owners and community bankers take real pride in their community. And many business owners would generally prefer to work with a local bank for their banking needs, all else being equal. But they can become discouraged by restrictive, outdated and slow banking processes. And that assumes their local bank can provide the loan they need, that they do qualify and the bank can offer it profitably.

To a great extent, small business lending at banks has not kept pace in a world where customers increasingly expect tasks to be immediate, intuitive, transparent and frictionless. They will search for alternatives if they feel that a process is too slow. Small business owners are no different.

But too often, banks treat small businesses like larger commercial clients when it comes to lending. This can lead to an overly burdensome, time consuming and costly process for the business owner and for the bank. It can also generate loan declines in situations where perfectly creditworthy businesses simply don’t fit into a bank’s commercial credit box.

This does not have to be the case. The way to solve this is to intelligently leverage technology to streamline the bank process and better respond to the preferences of business owners.

Banks today are already adopting this approach in other areas. Most, for example, offer online account opening and digital banking options for retail and business customers. And banks are experiencing major efficiency gains in mortgage and consumer lending by embracing technology on the retail side. But on the commercial side, banks have rolled out technology at a slower pace, leaving these customers to look elsewhere for a process that better fits their busy lives.

Meanwhile, financial technology companies, alternative finance companies and large banks have teams of employees focused exclusively on small business lending. Leveraging technology allows them to reach a long way from their brick-and-mortar locations and right into a community bank’s backyard.

Banks can compete with these lenders and recapture their customers by dramatically reducing the cost of originating a small business loan. They can do this by separating small business lending from commercial lending, defining a set of standards and scoring tools to approve small business loans and implementing the right technology.

A modern small business loan origination system generally supports multiple channels, which allows business owners to apply online while offering tools to guide bank staff through the application process in person or over the phone.

Once a business owner initiates an application, they should receive access to a web interface where they can securely provide additional information or upload required documents. These can be digitally collated and analyzed on the bank side, supporting a highly streamlined or even automated credit decisioning process.

The bank can then send approved loan offers that the business owner can accept electronically. A loan origination system can also automatically generate and send documents for electronic signing. All of this can happen within a matter of seconds.

Even by conservative estimates, there are billions of dollars of unmet demand for loans from creditworthy U.S. small businesses. That means there is money to be made by institutions — banks or otherwise — that can figure out how to responsibly provide credit to these businesses. Small business lending is a great way to establish and maintain healthy and profitable relationships with institutions in your community.

Small business lending can be a way for a community bank to become the leading resource for small business financing in its community, position itself for organic growth, cement strong community relationships and become an essential part of its local economy.