Enhancing small business financing in community banking by Will Tumulty
The demand for innovative small business financing solutions is growing as the nation’s economic environment continues to evolve.
Small businesses are an economic boon, accounting for over 99% of all businesses in the Unites States. The sad reality is that 38% of businesses lack the working capital necessary to finance their operations. This presents a strategic opportunity for community banks to grow their business banking initiatives and lending portfolios.
Small business financing is now a strategic differentiator and those institutions that are succeeding are the ones that have seamlessly incorporated new technology, adopted customer-centric approaches and employed collaborative strategies with the small businesses they serve.
Developing a small business lending strategy
For bankers, the key lies in providing business banking customers with quick decisions and access to funds. Like consumer lending, delivering a seamless lending experience has become mission-critical for small business financing as well. Response speed is paramount for small business owners who require fast access to capital in order to maximize emerging market opportunities or address unexpected expenses.
Unlike consumer underwriting, evaluating loan applications for small businesses requires additional data points and verifications including KYC/KYB compliance, cash flow analysis, and debt-to-income ratio assessments – a level of scrutiny that many community financial institutions may currently struggle to provide quickly and accurately.
Bankers are seeking ways to meet the needs of their small business customers while capitalizing on the demand for “lower dollar” small business financing. However, providing a better, faster customer experience at a lower acquisition cost can be a challenge.
Traditionally, community banks have turned to their core systems providers, but these systems are ill-equipped for small business financing. Banks require an efficient and cost-effective means of supporting loan applications, decisioning and funding for small business owners in need of immediate capital. Community banks are addressing this challenge by leveraging Lending-as-a-Service (LaaS) technology strategies to promote efficient underwriting and enhance the digital customer journey through an automated, data-driven process that integrates directly into their existing tech stacks.
Implementing highly configurable LaaS platforms is an effective way to meet the needs of a bank’s specific loan programs, as well as meeting regulatory requirements. If a bank is not already actively engaged in small business lending, LaaS solutions can provide an entry point for participation. Moreover, banks with established small business lending programs can use LaaS solutions to enhance their decisioning timeframe and accuracy for commercial lending.
Providing flexible financing options
Flexible financing options are also a differentiator. Providing flexible, real-time access to capital with management controls (like variable spending limits) allows small businesses to leverage their funds more effectively and safely. Instead of relying on banks’ operating hours and traditional methods like ACH and wire transfers, small business customers with a Business Line of Credit (LOC) can gain instant access through payment card access. This enables small business owners to control the amount they draw from their LOC to only the funds they immediately need and reduces their exposure to potential fraud compared to traditional small business credit cards.
LOC payment cardholders benefit from 24/7 access to funds along with a digital-first process from application to funding. These types of card services provide small business owners with the ability to access working capital anytime and anywhere.
Small business financing creates ‘stickier’ deposits
In today’s market, bankers are chasing “stickier” deposits and small business lending represents a prime opportunity. Small businesses take many shapes and forms, from traditional brick-and-mortar retailers and restaurants, to contracted service providers like landscapers, to professional services like accountants and physicians, to any number of part-time side hustles to generate additional income.
Small business owners typically maintain their checking and personal banking relationships at different institutions, but there is demand from small business account holders to consolidate their personal and business banking with a single partner. This segment of customers represents a significant opportunity for banks to grow their deposit base and retain existing customers.
Perhaps most appealing, small business checking accounts tend to be “sticker” compared to other depository accounts. Unlike other asset types, these accounts often have higher average balances, generate more transaction fee revenue, and demonstrate greater levels of stability over time.
Small business owners and the bankers who support them play an important role in the economic health of the communities they serve. By adopting more innovative business banking solutions and providing more flexible, real-time financing options, bankers can better support the millions of small businesses fueling the U.S. economy and strengthen their banks’ balance sheets as well.
Will Tumulty is CEO of Rapid Finance.
