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Lending & Credit Risk Loan Pricing SBA Lending Small Business Lending

How community financial institutions can regain the small business lending market

Abrigo
March 4, 2022
Read Time: 0 min

In today’s banking world, community banks are focused sharply on shareholders’ expectations for growth in earnings and return on equity. So, how can community banks support earnings and ROE growth in the face of intense regulatory scrutiny and competitive pressures on profitability? By leveraging their strengths in relationship lending and their access to technology in order to grow the small business loan portfolio profitably.

CFIs are poised to regain the small business lending market

Community Financial Institutions can leverage technology to improve customer experience and regain the small business lending market

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Takeaway 1

Ten years ago, larger financial institutions were funding a much larger percentage of small business loans than they are today.

Takeaway 2

Since the pandemic, customer expectations surrounding the lending process have changed, and online lending has increased in popularity.

Takeaway 3

Community financial institutions can leverage technology to compete with online lenders and regain the small business lending market.

Changing Lending Environment

Small businesses are turning to small lenders

According to FDIC data, in 2016, commercial banks reported 23 million total small business loans, an increase of 4 million from 2010, with an aggregate loan balance unchanged of just over $627 billion. However, large banks funded 87% of total small business loans and 68% of the aggregate loan balance. These figures illustrate larger banks' hold on the small business lending arena.

Fast forward to 2020. Statistics show a very different scenario, driven by PPP funding and pandemic-related digital transformations in the lending process. The Federal Reserve's Small Business Credit Survey, 2021 Report on Employer Firms, indicates only 42% of small business owners applied for a business loan at a large bank in 2020, while 43% applied for a loan at a small bank. These numbers show a dramatic shift in where small business owners seek funding. The data also shows the emergence and success of online lenders, accounting for 20% of business loan applications.

 A few inferences can be made from this data that may affect—for better or for worse—the financial institutions that fall outside the large bank category.

  • Covid-19 and the Paycheck Protection Program have made a significant impact on the SMB landscape and altered expectations regarding the lending process
  • Smaller financial institutions have adapted faster than their counterparts to the changing needs and expectations of small business owners
  • Online lenders have made significant strides in offering an alternative resource for small business loans

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In 2016, larger banks had an edge as limited availability of loan funds for small businesses led to hesitancy on the part of community banks to expand small business lending. Today, CFIs are uniquely positioned to regain the market.

Streamline With Software

Tapping technology to accelerate small business lending

For those financial institutions that have begun to leverage technology to enhance their small business lending efforts, the most significant hurdles are behind them. However, there should be a continued effort to streamline processes and use technology to create a better customer/member experience.

If they haven’t already started, financial institutions should begin tapping into technology advancements to accelerate the process of originating and onboarding a loan so they can compete profitably with the rest of the market, which includes online lenders. Leveraging technology will create higher efficiency through the workflow process and less reliance on staff and paper-intensive methods. Financial institutions that utilize technology effectively will be free to place the loan officer back in developing new loan opportunities and the credit analyst back in the role of underwriting loans, rather than keystroking financial information into spreading software and reviewing the spreads for errors or omissions.

Replacing the traditional community bank processes with modular and integrated technology customized to an institution's lending process can alter institutions’ customer service for the better. For example, approving and onboarding a small business loan, which used to take days and weeks, now takes community banks hours.

What's Next

How can CFIs continue their momentum in the small business lending arena?

Community financial institutions have a unique opportunity to grow their market share in small business lending by leveraging technology to improve efficiency and the speed of their processes. Automating time-intensive processes and standardizing some of those related to scoring and pricing can leave high-value lending staff the time to cultivate new business and spend more time assessing and meeting the needs of current customers. At the same time, the financial institution can compete more effectively without being tempted to loosen standards on interest rates and terms to secure the small business customer's business. In this way, community financial institutions can leverage the benefits of local ownership and local decision-making, supporting the local community while also managing risk and growing profitably for shareholders.

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About the Author

Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo’s platform centralizes the institution’s data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth. Make Big Things Happen.

Full Bio

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

Make Big Things Happen.