It’s budget season. Like banks across the nation, your team is drawing up future plans for greater growth, efficiencies, risk management and balance. Where does small business lending fit in this picture?
SMB lending has weathered some challenges post-2008. But more recent trends confirm SMB lending as a promising growth area for banks large and small. Bank lending is suddenly booming: American Banker reports double-digit loan growth for 80 banks surveyed, spanning either the entire loan portfolio or key loan categories like small business lending. JPMorgan Chase increased “consumer and community banking loans” by 23%, to cite just one of a string of examples.
Here are 3 reasons why you should allot a greater share of your 2017 budget to small business lending.
With streamlined operations, SMB lending is more profitable than you realize.
According to Oliver Wyman, underwriting small business loans costs a marginal $1600 – $3200 per loan. Compare these costs to the annual revenue loans under $100,000 generate – $700 to $3500 on average – and they’re clearly unprofitable.
So why pursue these loans at all? Because they’re unprofitable only because underwriting costs are needlessly high. Technology is modernizing lending processes to drive underwriting costs down dramatically.
Mirador partners have reduced loan origination costs by 25-50%. Moreover, declined loan applications often account for 30-40% of loan officers’ time. Mirador reduces this burden to virtually zero. (Our case study with Excelsior Growth Fund tells more.)
It’s simple math: reduce operational costs, and you’ll boost profitability margins.
Online lending is crucial for future competitiveness.
In a 2015 Cleveland Fed survey, small business borrowers seeking credit had two big complaints against traditional lenders: cumbersome loan processes and protracted response times ranked #1 and #2 respectively. This dissatisfaction has directly fueled alternative lenders’ growth, who excel at providing the speed and convenience borrowers demand.
That growth is considerable, too: According to Morgan Stanley loan origination at alternative lenders has doubled every year since 2010, reaching $12 billion in 2014. Last year SMBs sought 22% of their financing from digital marketplaces. SMBs want speed and convenience so much, they’re willing to borrow from alt-lenders despite exorbitantly high borrower costs and opaque lending terms.
The future implications are clear. Small business borrowers may turn to their community bank first – but will borrow from them only if the process is efficient and convenient. Millennial borrowers care about speed and convenience even more. For current and future competitiveness, online small business lending is officially a must-have.
Controlling risk is easier than you think.
Small business borrowers have an unfair reputation for un-creditworthiness. PAYDEX scores for small businesses did decline during the Great Recession – from 53.4 to 44.7, to be specific. Banks further tightened their SMB lending standards, exacerbating the trend. But most banks’ lending models were outdated and overly simplistic, based on manual, inefficient lending processes. While SMB borrowers’ creditworthiness has steadily improved post-recession, the banks have stuck with their overly strict lending models – leaving many thriving SMBs with zero access to capital.
By streamlining operations and modernizing lending models, banks capture a more nuanced, real-time picture of a prospective borrower’s creditworthiness – and process their loan application rapidly and efficiently. Enhanced data complements traditional credit metrics and provides a more accurate, comprehensive picture. (See our two previous posts exploring enhanced data for improved risk management.) Fintech can also help banks improve ongoing monitoring of SMB loans to minimize defaults still further.
Partnering with alternative lenders has tempted several banks, but it’s best to proceed carefully on that front. As this Bank Think article makes clear, digital marketplace lenders are less than candid about their many conflicts of interest. Add to this risk the increased scrutiny regulators are bringing to alternative lenders, and it’s clear these partners aren’t risk-free.
If you’re convinced small business lending deserves a bigger slice of the 2017 budget allocation, what’s next? Below is a quick punchlist of questions our partners find helpful in determining their SMB lending plan:
- What piece of the SMB lending market do you have currently?
- Are you offering customers the right kinds of loan products – for instance, SBA loans?
- Do you offer a great borrower experience, online and off?
- What are your goals for SMB lending? Are you looking to grow your business, retain or expand engagement with key customers, improve operational efficiencies, or some combination of the above?
- What’s your preferred timetable? Offering a modernized online platform for small business lending, customized to your credit memo and risk criteria, can happen in 60 days or less.
Contact Mirador to modernize your small business lending in 2017. It’s a priority with remarkable ROI, both near-term and in the long run.