Making Small Business Loans Profitable

By: Mary Ellen Biery

At the risk of stating the obvious, bankers are generally good with numbers.

So it makes sense that lenders and financial institutions are more enthusiastic about making the larger business loans than making the smaller loans. After all, it takes as much time to process a small loan as a big one, yet the banker’s commission and the bank’s profit are higher for the larger loans.

But forward-looking banks are finding they can originate small business loans profitably and enable lenders to sell them for a worthwhile commission by digitizing the lending process. And in digitizing the business lending process, financial institutions also address frustrations small business borrowers have with slow, paper-based application processes that don’t meet their needs.

Digitizing to make loans profitable

Digitizing the small business lending process will be the focus of a presentation this week by Abrigo representatives at American Banker’s Small Business Banking Conference in Nashville. The conference is expected to draw representatives from more than 150 financial institutions, technology vendors and other industry experts.

construction architect engineer small businessAbrigo representatives Alex Rousseau and Rick Anderson will provide a brief demonstration of the company’s banking platform, an end-to-end solution that automates lending, credit risk and portfolio risk. The suite of products can also drive faster lending decisions and scalable processes that grow with the loan portfolio and the bank.

“At the American Banker’s conference, we’ll be showing how financial institutions can capture more loans and automate the process, how we can digitize that process and really improve the speed,” Rousseau said. “We can make the process more consistent, faster and digital.”

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Rousseau said a lot of banks don’t have the ability to digitally accept and process business loan applications, so part of the demonstration will show the Sageworks Online Loan Application. “It’s a digital funnel; business borrowers can deliver a completed application and all the supporting documentation electronically. The application can be completed either online, in the branch or with the help of a lender,” Rousseau said.

Most banks lack online loan applications

Even though many customers want the flexibility that digital applications provide, a recent survey by state banking commissioners of 521 community banks (most with assets below $10 billion) found that only 39 percent offered online loan applications on an ongoing basis. Another 38 percent don’t offer them and have no plans to offer them, according to the “Community Banking in the 21st Century 2018” report. Twenty-three percent of those surveyed don’t currently offer online loan applications but plan to do so in the next 12 months.

The Abrigo Banking Platform also has the ability to automate the rest of the loan approval process, Rousseau noted. Once the application is complete, all of the information is captured and used for all other stages of the approval process so that staff don’t have to keep manually re-entering data.

“We can automatically pull the credit report and can recommend a decision that tells the institution electronically whether it’s a thumbs up on the loan or a thumbs down or a ‘maybe’ loan – all without anyone from the bank touching it, or if they do touch it, doing it with just a few clicks,” he said.

All of this allows the bank to get back to the customer more quickly, providing a better customer experience, Rousseau said. But it also provides operational benefits.

Efficiency, time to focus on complex loans

“You want to process the small loans quickly, so that your lenders can rapidly book them and be more efficient, leaving extra time to focus on the bigger, more complex loans,” Rousseau said. “You want these loans, but you want to make them as quick and as painless as possible. This is a way to do that, and it’s a way to keep up with these new digital, non-bank platforms, too.”

Rousseau and Anderson are among several Abrigo experts who speak regularly on a variety of topics, including loan-growth practices, credit risk, global cash flow analysis, the allowance for loan and lease losses (ALLL) and stress testing.

Remaining competitive in small business lending will also be the focus of a panel discussion during the American Banker Small Business Banking Conference, and that panel will include Laurie Stewart, president and CEO of Sound Community Bank and a member of the Abrigo Advisory Board.

Stewart and other members of the Sageworks Advisory Board recently discussed how they are addressing current challenges related to lending and other areas of their financial institutions, as well as how technology is helping to address some of those challenges, in a Sageworks eBook, “Agile Bankers: How Community Banks are Addressing Disruption, Risk and Growth.”

More loan packages with existing staff

Abrigo Advisory Board member Duane Abadie, who is president of First Bank and Trust of New Orleans, noted in the eBook that his bank has been able to produce about 40 percent more loan packages with existing credit department staff since his bank automated its credit analysis process.

“Getting it done easy and quick and as efficiently as possible allows us to focus our resources for maximum return … focusing them on business opportunities as opposed to the administrative aspect,” Abadie said in the eBook.

Looking at the entire small business lending cycle, from loan request through approval to closing, technology can transform the business lending process from one that consumes 35 labor hours at a cost of $2,422 to one that takes 16 hours at a cost of just over $1,000, according to Abrigo Vice President of Banking Neill LeCorgne. He estimates a technology lending solution like the Abrigo Banking Platform offers can also shorten small business lending renewals to just over 3 hours (at a labor cost of just over $300), compared with a typical process that parallels new loan onboarding (35 hours at a cost of $2,422).

Those who aren’t attending the American Banker conference can see a demonstration of the Abrigo Loan Automation solution on Wednesday via a webinar with Abrigo Senior Risk Consultant Bryce Lugar. He will provide information on the solution’s configurable loan application templates and will demonstrate how the solution allows conditional logic to be applied in various loan decisioning scenarios.

About the Author

Mary Ellen Biery

Mary Ellen Biery is a Senior Writer and Content Specialist at Abrigo.

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About Abrigo

Abrigo is a leading technology provider of compliance, credit risk, and lending solutions that community financial institutions use to manage risk and drive growth. Our software automates key processes — from anti-money laundering to fraud detection to lending solutions — empowering our customers by addressing their Enterprise Risk Management needs.

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