Is growing the small business loan portfolio on your bank or credit union’s agenda? If so, you’re not alone.
A recent survey by the American Bankers Association found that 61 percent of banks surveyed plan to moderately or aggressively grow their small business lending (loans between $3 million and $100 million) over the next two years. In other words, many financial institutions will be vying for the same small and medium-sized businesses when it comes to lending.
Top problems in small business lending
With increased competition ahead, banks have several choices for winning new small business loans. They could offer better pricing or easier terms than competitors.
However, both of those approaches could hurt bank returns and potentially increase risk for the institution. Another option is to make small business lending more efficient and borrower-friendly so that the financial institution can win, process and manage more loans without big increases in staffing or other expenses. Indeed, banks surveyed by the ABA most frequently identified the following as their top challenges in small business lending:
- Process, operations, and staffing and
About three-quarters of the nearly 200 respondents cited efficiency as a challenge when it comes to small business lending. Process, operations, and staffing was named by 62 percent of those surveyed, while 55 percent identified cost as a small-business lending challenge.
“For now, non-bank alternative lenders have the upper hand on efficiency,” the ABA said in its report, The State of Digital Lending. “Operating expense as a percentage of outstanding loans run at approximately 6 percent at banks that use traditional processes, compared to less than 2 percent at the non-bank alternative lenders.”
For most banks, the paper- and labor-intensive process of small business lending results in multiple hand-offs between bank employees, frequent back-and-forth communications with customers and lengthy approval times, despite the small-balance nature of many small business loans.
“By the very nature of it, because it’s so transactionally based, loan operations can always be improved on,” Alison Trapp, who leads the credit risk practice for Abrigo Advisory Services, said during a recent webinar on process improvement. “How are we managing the flow of documents is a huge piece of loan ops; how are we storing those documents appropriately; how are we getting them to and from our lenders or appraisers or the third-party vendors that we use -- all of that stuff really opens itself up to process improvement. I think everybody wants to bring in the loans more efficiently.”