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 Abrigo found that 87 percent of banks surveyed are working to win more small business loans in 2022. In other words, many financial institutions will be prioritizing the same segment of the portfolio this year, therefore vying for some of the same small and medium-sized businesses.
How to win small business loans this year
Making small business loans efficient and worthwhile
Digitalizing the lending process can help financial institutions win small business loans and meet customers' needs
You might also like this webinar on small business lending best practices.
Lack of efficiency and staffing problems can make small business loans seem like more trouble than they're worth
Digitalizing these loans can reduce processing time, allowing you to provide decisions more quickly and transparently
Customers still prefer traditional institution's knowledgeable service, especially when the process is streamlined
Roadblocks to Success
Top problems in small business lending
With increased competition ahead, financial institutions 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, the financial institutions surveyed most frequently identified the following as their top challenges in small business lending:
- Process, operations, and staffing
Over half of the survey respondents cited efficiency as a challenge when it comes to small business lending. Process, operations, and staffing were named by 16 percent of those surveyed, and 25 percent flagged competition for loans as a primary challenge.
The consumer demand for digitization and customer-centric banking is higher than ever. The ABA stated in its October 2021 State of Digital Lending report that “baby boomers, who until 2020 lagged in digital adoption, upped their online game, with 68 percent skipping human interaction to make a decision about banking products, up from 55 percent before the pandemic.” The report found that 85 percent of survey respondents would likely continue some or all financial transactions digitally even after the pandemic.
Historically, small business loans meant paper—and a labor-intensive process resulting in multiple hand-offs between bank employees, frequent back-and-forth communications with customers, and lengthy approval times, despite the small-balance nature of the loans. If the current and prevailing expectation from the public is an efficient digital experience, banks and credit unions will need to put aside their old ways and leverage lending automation software and digital interfaces.
“By the very nature of it, because it’s so transactionally based, loan operations can always be improved on,” said Abrigo’s Vice President of Implementation Alison Trapp during a webinar on process improvement. “How we manage the flow of documents is a huge piece of loan ops; how we store those documents appropriately; how we’re getting them to and from our lenders or appraisers or the third-party vendors that we use—all that stuff really opens itself up to process improvement. I think everybody wants to bring in the loans more efficiently.”
Streamline with Software
Life-of-loan digitalization in small business lending
Digitalizing the small business loan from beginning to end can reduce processing time, allowing banks and credit unions to provide decisions more quickly and transparently. Life-of-loan digitalization also makes it easier for high-salaried lending and credit professionals to focus on loans that require more intense analysis. When they spend less time on duplicative data entry and tracking down components of the application, they can prioritize more complex loans.
According to the ABA report, smaller banks tend to lag in technology adoption for lending, which means they have tremendous opportunity to improve the efficiency and profitability of small business loans. With stiff competition from alternative lenders, non-bank financial institutions, and money service businesses who are pushing the boundaries of the traditional lending model, financial institutions can’t afford to deny the efficiencies and convenient customer experience of digitally enhanced loan systems. Many financial institutions have discovered firsthand how technology can boost efficiency and minimize the cost of the entire loan process from origination to closing. When the Paycheck Protection Program brought in loans with short life cycles, financial institutions could easily see the results of a well-balanced loan automation software.
Configured vs. Customized
Considering the complexity of the banking technology ecosystem, it is rare that a financial institution has the capital and wherewithal to build its own lending software system. That leaves two options: purchasing custom software or modifying one-size-fits-all software to fit their circumstances. Factoring the reality of time and cost, both of which skyrocket in a custom software scenario, the best option for most banks and credit unions is the tweaked software solution. A recent episode of Ahead of the Curve: A Banker’s Podcast outlined some common oversights when considering loan origination software.
• Underestimating the importance of executive leadership when creating goals and objectives surrounding software purchases
• Attempting to replicate the current lending process with automation
• Failing to bring the end-users into the onboarding process to have their opinions and interests represented
• Viewing implementation decisions as one-time items, when they could affect future training, onboarding, enhancements, and more
The good news is that some vendors can assist financial institutions with process optimization and management changes to help them improve policy and operations.
Bring small business loans in line with your normal loan processing efficiency standards with Sageworks Lending Software.
Knowing Your Customer
The traditional institution advantage
Despite the challenges that come with adopting new procedures, community financial institutions by their very nature have a notable advantage over online and alternative lenders when it comes to small business lending. According to a J.D Power U.S. Consumer Lending Satisfaction Study, online lenders fell behind in overall satisfaction scores, both in the early stages of the pandemic in 2020 and as the pandemic continued into 2021. The study concluded that "traditional lenders significantly outperformed FinTechs in putting the customer first; providing guidance; [aligning with] social views; providing honest communication; treating people fairly; and providing more reliable technology." Financial institutions still know their local businesses better, and they show it by providing superior personalized service. With additional automation and new technology, small business loans can continue to be a profitable and worthwhile revenue stream.