According to a report by the National Small Business Association, 27% of small businesses were unable to obtain adequate financing in 2015. While not every small business owner is an ideal candidate, many eligible applicants are still being turned down by community banks. Why are financial institutions shying away from this loan income when so many businesses need the assistance?
If your bank isn’t prioritizing small business loans, you could be missing out on a potential source of revenue. Online platforms that specialize in small business lending have been popping up in recent years and are gaining the market share that community banks lose because of their reluctance to lend to these business owners.
Some institutions perceive that small business loans take the focus away from larger loans they’re administering. About 80% of small businesses want loans below $500,000, but because it costs the same to underwrite a $1 million loan as loans under $500,000, larger loans are more profitable.
Funding small businesses can help your bank build trust and credibility with new consumers in your community. You could even highlight your involvement with, say, a window sticker that says, “Funding for this business provided by….”
By making these loans, you’re also investing in the future of your community. If successful, these small businesses will grow and need more employees. Job growth, in turn, drives housing and population growth, which leads to more potential consumers in need of your accounts and services.
One way to break into the small business sector, appoint a small business leader at your institution, who owns and is committed to your small business strategy. Having a leader ensures this becomes a real initiative at your institution rather than something that gets added as an action item to a strategic plan and then is never prioritized.
While small business loans can be a viable source of income for your institution, there’s also an opportunity to offer personal products to the employees of small businesses you loan to. Bank-at-work partnerships provide employees with a convenient way to conduct financial business at the workplace and deliver advantages to the employees of your small business clients.
Business owners get benefits too! Perks for them include increased participation in direct deposit, improvement to the employee benefits package (which appeals to potential recruits), and saving employees time and money without affecting the company’s bottom line.
A bank-at-work program is easy to implement. Your small business leader will go to each business and speak with employees about what the program can offer. Enrolled employees receive perks for banking services like free checking and savings accounts, consumer loan discounts, and cash rewards. You could also offer seminars where a representative from your institution teaches employees about financial wellness on a recurring basis.
Not every small business that applies for a loan is qualified, but with more than a quarter of them unable to obtain the funding they need, community banks are obviously not connecting well with those who are good candidates. Taking the steps to close this gap and providing loans to more eligible businesses can undoubtedly have a positive impact on your institution’s profits and your surrounding communities.