Banks across the country operate with similar values: to be good, strong community partners that support the everyday financing needs of their fellow neighbors. However, small business owners often need more assistance. Whether they can find what they seek from their everyday bank isn’t always guaranteed.
Banks that manually fund small business loans often have more difficulty doing so, and new data shows that small businesses aren’t always loyal to them in return.
Ultimately, banks should want to continue growing relationships with small businesses as they scale to serve them better in the future. Ending a relationship because they cannot fund a current need is shortsighted and risky. The minute you decline a customer, you risk losing them for life. There’s a better way to operate.
Beware the Loyalty Cliff
Small business loans are denied for various reasons, including low credit scores, a short business history, broader industry risks, and more. This can be a sticky situation for any bank eager to please its customers.
Small businesses aren’t always clamoring for a long-term relationship, either. By necessity, they have had to become scrappy, often jumping to whichever financial institution offers the speed, flexibility, and technology that adapts to their needs. Recent data confirms that 67 percent of small business owners have no preference for where they get their loans.
Banks must address this loyalty cliff head-on or fear being left behind.
Banks Need the Business
Retaining and boosting insured deposits is critical for a bank’s health. The 2023 Silicon Valley Bank bankruptcy underscored this. Overnight, $151.6 billion of uninsured deposits were almost wiped out due to factors including investor panic and insured deposits. This devastated the startup community and sent shockwaves through the financial markets.
Small business owners who can bank with the same financial institution willing to lend capital are happy customers. However, they’re often left with a sour taste if the bank can’t make the financing portion work. Accordingly, they’ll move their money and services to the banks that best suit their needs. Who can blame them?
This is a predicament. Financial institutions don’t want that situation to happen, so they must find a creative solution.
Building a Network with Non-Deposit Lenders
Banks must find a way to navigate the awkward situation of turning down a loan while building rapport with small business owners. They must enter the solutions business by leaning on partners to provide what they cannot. Enter non-deposit lenders, capable of financing small business loans and adding value while the bank retains the overall relationship. These entities do not operate with a full banking license nor offer deposit, checking, or savings services.
Nimble non-deposit lenders like On Deck Capital, Fundbox, or Quantum Lending Solutions provide working capital for small businesses without competing with the bank’s primary deposit needs. They can often become white-label partners, allowing them to meet financing needs while seamlessly retaining the overall relationship.
Then, when the SMBs creditworthiness, size, or scale has grown, the original bank can lend directly to it.
Running a Business Is Hard
Fortunately, there are so many good ways to be partners with small businesses outside of providing them loans.
Respect their time. Business owners can’t always wait six to twelve weeks for an application process, nor do they always want or need to visit a branch. How can you help anticipate and automate their needs?
Be an ally. Do what you can to put them at ease, and find low-friction ways to be a great partner.
Establish rapport by building relationships. Many underserved businesses feel intimidated by visiting a branch in person. Take the time to get to know these community members and make them feel at ease in your financial institution.
Running a business means wearing many hats. According to the BLS, 20 percent of small businesses fail within their first year, 50 percent within five years, and 65 percent within a decade. These businesses need banking relationships that will support them during their make-or-break years. If your bank cannot do it themselves, they build a network that can.
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