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How Relationship Lending & A Transaction-Oriented Focus Can Win More Business Loans

Mary Ellen Biery
February 25, 2022
Read Time: 0 min

Personalized Touch with Efficient Service Can Boost Lending

Banks and credit unions can boost business lending by combining a relationship focus with transaction-oriented processing. 

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Lenders Easing Terms
More business loans, more competition

Is making more business loans a top focus at your bank or credit union this year?

You’re in good company.

Nearly 90 of 100 bankers surveyed during a recent Abrigo webinar said their institutions plan to increase the volume of small business lending or commercial lending this year. However, many traditional community lenders will face real challenges meeting their lending goals for more business loans and higher yield, given expected interest rate hikes, higher non-interest expenses, and increasing competition for borrowers.

Indeed, some bankers are already giving up spreads in order to win loans, according to the January Fed Senior Loan Officer Survey. Bankers reported easier standards and terms on commercial and industrial loans to firms of all sizes in the fourth quarter, with 44% of respondents citing more aggressive competition from other banks or nonbank lenders as an important reason.

Among those with eased terms, 31% reported they had narrowed spreads of small business loan rates over the cost of funds, and 43% reported having narrowed spreads for large and middle-market loans.

This competition can only increase as the lending landscape continues to shift. Cornerstone Advisors surveys have found that the percentage of community financial institution executives who see fintech companies like Square and PayPal, which offer business loans, as significant threats has increased from 36% in 2021 to 47% in 2022.

Streamlined, Quick
Win more business loans you want

So how can financial institutions win more business loans while making sound, profitable loans in this environment?

One option: marry the best of traditional and the best of new lending and commercial credit analysis approaches.

The traditional relationship lending approach for business loans – personal attention and local connections – offered by community banks and credit unions provides a competitive advantage in winning small business loans. It is the backbone of what many community financial institutions do, and they do it well. In addition, it works for many business owners who want a more traditional consultative approach.

Yet many business borrowers want and expect features that online lenders, newer fintechs, or large banks with more transactional approaches offer:

  • A streamlined, digital application
  • Remote access to their loan application status
  • Quick decisions

The faster decisions from transaction-oriented business lenders are often enabled by auto-scoring and in-house decisioning for selected loans (typically the smallest) with little or no human intervention. The speed and efficiency provided by business lending software are essential to making the small loans profitable.

Meanwhile, the business borrowers — Amazon sellers, store owners who offer Klarma, or proprietors who see their workers more than their families — are seeking quick processes when they need financing. They’d rather apply online, quickly, at night than take time off during business hours to visit a person at a branch. And they need to find out whether the loan will be approved within a few days rather than wait months.

In many cases, these borrowers are willing to pay more for those features in the form of higher rates.

Community financial institutions that focus solely on relationship lending might be losing out on serving those business customers or members.

In addition, business owners often report lower satisfaction levels with online lenders than with traditional lenders. In other words, banks and credit unions have an opportunity to win more business loans sought by these borrowers if they can offer services conveniently and efficiently via increased digitalization.

Thankfully, many banks and credit unions have expanded their digital business lending  offerings since the pandemic began. These business lenders are in a better position to combine more efficient transaction or manual task processing with the relationship focus of community lenders.

You might also like to watch this webinar: "Taking the stimulus out of credit analysis."

PPP Proved Technology
Digitalization: Small business lending priority

Banking during COVID —especially origination and forgiveness related to the Paycheck Protection Program (PPP) — gave many financial institutions two years of proof that automating existing lending processes and operations provides better customer/member experiences. It also showed that bankers could dispense quickly with manual tasks that previously bogged them down. Online loan applications and other digitalization sped up borrower funding and freed up time to provide more value-added services, such as advising on PPP requirements. Automation and transforming additional small business and commercial credit analysis processes can also help lenders scale efficiently as the strengthening economy drives new loan demand.  

Consider Dover Federal Credit Union, which was able to increase its member business lending portfolio by 45% without adding staff after moving to an end-to-end loan origination system (LOS). The credit union previously relied on paper-based applications, manual financial spreading, and tracking everything (documents required for origination, customer notifications, tickler files) through Excel and email.

Dover Federal’s member business loans for under $50,000, which are primarily processed through the LOS automated decisioning capability, can be completed in one to two days, compared with an earlier turnaround of between three and four days. Staffers now use some of the time savings gained through automation to work on annual loan renewals or make phone calls to clients.

Like Dover, some financial institutions enlist automated loan underwriting that is based on the institution’s policies and risk appetite for small business or member business loans below a specific size. For larger loans, they automate part of origination and retain other relationship-lending aspects.

Other lenders can take this same approach, and many seem to be trying to do so.

Community financial institutions adapting

Community banks are in a challenging economic environment characterized by declining loan demand, abundant liquidity, and narrower net interest margins, according to the 2021 Conference of State Bank Supervisors’ National Survey of Community Banks.

In a blog series, “Adapting to the Digital Age,” researchers from CSBS, the St. Louis Fed, and Temple University examined how financial institutions are adjusting. “One possible path to reverse the declining trend in profitability is through investments in technology," said CSBS Chief Economist Thomas F. Siems, Jonathan A. Scott, a Temple University Professor and CSBS Adjunct Research Scholar, and Meredith A. Covington, Manager of Supervision Policy, Research and Analysis at the Federal Reserve Bank of St. Louis.

Community financial institutions’ use of various technologies for lending and other banking services is up over the past four years, the researchers noted. However, many institutions are still performing the processes by hand that Dover Federal Credit Union and others have automated.

For example, in the CSBS survey:

Scale small business and commercial credit analysis

Researchers examining the CSBS survey results found evidence that institutions with the lowest tech usage appeared to have lower economies of scale than those with more tech usage. Banks with the lowest tech usage appear to have a higher ratio of data processing costs to total assets. The ratio has some weaknesses as a proxy for economies of scale, but it is a reasonable one, Siems said in an interview.

“It’s kind of pointing to the fact that you’re getting greater economies of scale through the use of the technology,” he said. “It appears to be helping.”

Banks and credit unions understand the importance of keeping up with competitors, whether they are financial institutions down the street or out-of-market online lenders. Technology allows lenders to blend both transaction-oriented aspects of origination, such as fast processing, with the personal touches of community banking that set local institutions apart.

“They aren’t mutually exclusive,” Siems said of both approaches. “You’ve got to marry the relationship lending idea or practice with a good technology platform.”

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About the Author

Mary Ellen Biery

Senior Strategist & Content Manager
Mary Ellen Biery is Senior Strategist & Content Manager at Abrigo, where she works with advisors and other experts to develop whitepapers, original research, and other resources that help financial institutions drive growth and manage risk. A former equities reporter for Dow Jones Newswires whose work has been published in

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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.

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