When it comes to small business lending, banks are no longer the only game in town.
Alternative lending companies have grown into a formidable competitor to traditional banks, eagerly providing financing to small businesses.
These alternative lenders handled some 32% of all business loan applications last year, up from 24% in the previous year, according to data from the Federal Reserve.
These trends, which come at a time when banks are grappling with rising attrition and a slowing deposits business, underscore how important it is for lenders of all sizes to re-examine their position on small business lending and be open to evolving as businesses seek new ways to access capital.
Expanding loan options to better compete with the rise in fintech lending can help banks deepen their existing small business customer relationships and win over new clients, creating a potential gateway for new deposit business and additional revenue streams.
A Challenging Financial Market
The value of leveraging a small business borrower into a full-fledged depositor can’t be overstated when you consider how U.S. bank deposits are declining.
Deposits at banks with less than $10 billion in assets dropped 2% last year, according to American Banker. That included a 5% decrease in non-interest-bearing deposits. At smaller banks (those with $1 billion or less in assets), total deposits slumped 7.5% from 2013 to 2017.
Let’s face it, the days of bank loyalty are a thing of the past.
As recently as five years ago, banks could generally count on loyalty from their small business customers. These days, businesses have more banking options than ever, so they’re much more likely to shift their deposits or borrowing to whichever lender best meets their needs.
Many are turning to alternative lending companies that offer a fast and easy application process, quick funding, and a higher chance of being approved for a loan.
This is one reason why traditional lenders are seeing attrition increase. Corporate banks annually lose 10% to 15% of gross revenues to attrition, according to Boston Consulting Group.
Many banks only track when a customer closes their last account on their way to falling into the arms of another lender. More gradual defections, as clients close a few accounts or reduce the amount in their portfolio, account for 9% to 13% of gross revenue loss per year.
Broaden Lending to Small Businesses
Many businesses are increasingly looking for new financing options. This represents a natural opportunity for banks, but also for alternative lenders, which have made the business lending sector more competitive over the past decade.
To be more competitive, banks need to find ways to expand their loan business, while also taking steps to reduce attrition in their existing accounts.
Winning over small business clients through more flexible lending options is a key way to tackle this challenge. That’s because a bank that holds the primary credit relationship with a small business generally lands their deposit business as well.
Clearly every credit applicant should be considered on their individual merits, but banks that shy away from lending to small businesses because they deem them too risky need to consider whether they’re passing up opportunities for growth in a competitive market.
Can’t Beat ‘Em? Join ‘Em
So how can traditional banks bolster their deposits and lending business? Take a page from the alternative lending companies’ playbook.
One key area is the speed and ease of loan processing. The main reason clients apply for funding from an online lender is how quickly the decision and funding of the loan is made, according to a Federal Reserve survey. The second biggest reason? Small businesses stand a better chance of being funded.
Online lenders have approved more small business loans than small and large banks for the past two years, according to the Federal Reserve.
One way that traditional banks are becoming faster and more flexible in their small business lending is by partnering with online lending networks. These partnerships can help banks clear some of the obstacles that they’ve faced when extending small business loans, including documentation, compliance, cost and underwriting.
The net gain for traditional banks: They can offer existing clients a faster, easier loan application experience, while benefiting from a streamlined underwriting process and lower operational costs.
Surprisingly, enabling a relationship with a lender network is easy, with no IT costs required.
That said, exploring enhancements to small business lending should definitely be a priority in calendar year 2019.
Eddie Davis is the VP of Business Development for FINSYNC, a consolidated cash flow management platform focused on helping businesses grow. FINSYNC’s intuitive online tools help automate payments and accounting, and provide valuable insight through cash flow analysis. The lending network gives businesses access to fast, affordable financing. FINSYNC’s virtual community of specialists provides unrivaled support with bookkeeping, accounting, human capital management, financial analysis and corporate strategy. Connect with Eddie on LinkedIn and follow @FINSYNC on Twitter.