Bank lending is suddenly booming. A recent American Banker article 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.
How can your bank grow your small business lending portfolio profitably? We researched two customer segments where SMB lending is poised to grow fast – and the potential upside of each may surprise you.

 


 1. Younger small-business owners

 

All banks want to attract the next generation of business owners. According to Barlow Research, 12% of all small- to medium-sized businesses (SMBs) is under 45 years old. What’s more, about half of small business owners in the 65+ category expect to hand off ownership of their businesses in the next five years – with most businesses falling into younger operators’ hands.[1]

SMB owners under 45 represent $6,627 in annual revenue to lenders, according to Barlow Research’s 2015 Value of the Customer model. These millennial and Gen-X business owners use 1.6 credit products on average, much higher rate than small businesses overall.

Younger small-business owners also demand online access to financial services. They favor mobile touchpoints over traditional branch interations at a rate double that of the 65+ business owner group. [2] Similarly, 36% of younger small-business owners want to apply for loans online – again, more than double the 65+ owner rate.[3]

The conclusions here are clear: millennials and Gen-Xers will soon dominate the small business lending market and bring their evolving technology preferences with them. Readying your bank for online access couldn’t be more important to capture this growth opportunity. Our free whitepaper How Banks Can Attract More Millennial Customers offers additional tips and insights.

2. Existing borrowers

Lenders can also grow small business lending profits by mining current borrower relationships – yet this growth area often goes unnoticed.

SMB borrowers offer great baseline profit potential, given the right cost efficiencies. Net potential revenue per SMB relationship ranges between $5,000 to nearly $23,000 according to Barlow Research.[4] Mirador partners report reducing in loan origination costs of 25-50%, with even more dramatic efficiencies in outright declined loans. (Read our case study with Excelsior Growth Fund for more info.)

Furthermore, simplified loan origination often revives borrower demand. According to a 2015 Cleveland Federal Reserve study, 22% of SMB credit applications are going to digital marketplaces despite high borrower costs and opaque lending terms.[5]

Why? It’s simple, really. Alternative lenders make funding easy, convenient and reliable. Small business loan demand does exist for credit sources that can deliver funding rapidly and conveniently – when and how small businesses actually need it.

Big data also enables lenders to expand their definition of creditworthiness responsibly. More nuanced loan analysis helps banks identify more creditworthy borrowers at limited risk. Additional data-points, like real-time shipping trends and current Yelp reviews, can help lenders identify promising borrowers that might appear edge-case based on limited traditional criteria.

Again, the takeaway is simple: existing bank customers are a potential gold mine of additional loan activity – provided you approach them on their terms. Existing customers open small businesses all the time that are often credit-hungry – but they lack time or inclination to visit a bank branch to fill out mountains of paperwork. Instead that untapped demand seeks out alternative lenders to meet their needs, instead of turning to their trusted primary bank for loans on more affordable, transparent terms. What’s wrong with this picture?


Small business lending offers greater growth potential than many lenders realize – but banks must equip themselves to tap that latent demand. By bringing loan applications online and harnessing the power of big data, banks can streamline operational costs, minimize loan defaults and make SMB lending profitable and flourishing again.

1. Barlow February First Friday Webcast, slide 6
2. Barlow First Friday Webcast, Small Business Rolling 8 Quarter Data 1Q2014 – 4Q2015, slide 12
3. Barlow First Friday Webcast, Annual Payments Study 2014-2015 Data, slide 33
4. Barlow 2015 SB Annual Report, Annual Payments Study 2013-2014 Data, slide 6
5. Cleveland Federal Reserve 2015 Small Business Credit Survey, page 11.

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