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Big Business in Small-Dollars

Posted by Mark Messick

Jul 11, 2018 11:00:00 AM

Big Business 

Perhaps you saw the bulletin issued recently by the OCC encouraging financial institutions to make small-dollar, short-term, consumer loans.  I did and for me it points to a big hole in the traditional lending net that needs to be mended (and not by credit card offers).  While our topic today doesn’t deal with consumer lending outright, the bulletin reminded me of three great reasons why today’s financial institutions should consider offering small-dollar loans to businesses.

Little Businesses Grow Up to Be Big Businesses

This sounds like such a well-worn mantra that you’re likely to gloss over it in favor of some splashy new trend that will be gone tomorrow. But aren’t the best ideas typically borne out of time-tested principles that produce slow and steady results? Are you in the camp that believes the national lenders get all the business loans because they offer the best rates and you can’t possibly compete with that? Business owner surveys tell us over and over that borrowers are motivated by the experience (and the relationship) – not the rate. Why do you think so many credit-worthy businesses turn to alternative lenders and are willing to pay more?

Listen, every business gets its start somewhere. And while the utopian idea of bootstrapping with cash and angel investors is held up as an ideal, the truth is that every business, regardless of size, borrows money at least once every three years. And if the business is growing (hence the title of this section), then they likely need to borrow more often than that. Providing an entry point with small, responsible loan amounts and repayment schedules is the prescription for a lifelong relationship with a borrower.

It’s not just the loan amounts that will grow. The margin on the total relationship will too. Why do you have a website? Why do you have friendly people working in the branches? Why do you offer so many services aimed at businesses? Because you want to provide entry points with a positive experience commercial borrowers will respond to. When they like you, they buy everything they can from you. And the cost of gaining that relationship goes down with every product and service they add. When they borrow from you, they hire people in your community.  When people in your community have jobs, they spend more money. And more local businesses will open so that people with jobs can buy stuff. It’s simple really.

Protect the Weak, Be the Strong

What a cop out it is to stand back with arms folded and pontificate about being fiscally responsible by not offering small-dollar loans to “in-need” borrowers. Nobody’s asking you to compromise your culture or credit policy to take unnecessary risk, but are you really doing all you can to underwrite and structure loans to every kind of small business that’s worthy? Or have you taken a pass because the short-term reward isn’t worth the risk or cost? It’s true that you can’t approve everyone, nor should you. But you can and should figure out ways to take care of the borrowers who need you, before someone less trustworthy takes advantage of them.

There’s an alternative lending market for a reason. Many reasons, actually. But the top two reasons why small business borrowers shop that marketplace are: they think they will be turned down at their community financial institution (this includes the no-offer loan offer in addition to the outright “No”) and it will take too long to get an answer. Literally, some owners have completed online degrees faster than they can get a “Yes” from your lending department. So what “alternative” do they have?

Unfortunately, the good lenders operating in this space are vastly outnumbered by the bad.  We can have a long conversation at an outdoor café in Tuscany about it, but the truth is that the recession opened a hole that the bad guys filled.  And anybody with an “algorithm” and a decent web programmer was able to offer “quick and easy” loans to small businesses based on their “cash flow.”  Never mind that it’s the lender’s cash flow they’re really concerned about. How would a business owner know who to trust anyway? Google reviews = fake news. In reality, they should trust you – their local neighborhood financial institution or the alternative lenders you partner with when you can’t help someone but want to in the future (while keeping the relationship, by the way).

Efficient Is as Efficient Does

If at this point you’ve retreated to the tired excuse that you can’t make these loans worthwhile because of the costs associated with delivering them, then I probably failed somewhere above. Because what you should be saying is, “I’d like to engage in this type of lending, but I need a better process and a game-plan.”  It’s true that your shop likely isn’t very efficient or profitable when it comes to these size loans because it takes so much manpower to underwrite them. But that’s the source of the problem, isn’t it (manual intervention)? What if you could create significant volume without raising your costs or risk? Dig a little deeper because it’s possible to do both.

One needs only look at the proliferation of companies engaged in loan origination software to see that technology is the solution. Some provide a fantastic borrower experience on the front end that makes it easy for the borrower to apply so you can give a quick conditional answer. Others focus on the decision engine piece to help you triage and underwrite quickly with data that truly matters. You’ll want one that also generates offers you’ve preset and comes with electronic-signature for easy closing. And whether you set the switch to auto-decide or choose to have some manual review (you can set these parameters by lots of variables, by the way), you’d be surprised just how much is possible before anyone in your shop has to touch a loan.

At the end of the day, there are platforms that include all the pieces you need and have the integrations necessary with your Core, legacy systems, and third-party data sources to make this not only possible, but profitable. Don’t let someone else’s perception of small-dollar business loans cause you to miss out on a valuable segment of the market. Figure it out and make it happen. Small businesses in your community are counting on you.

If you missed the OCC bulletin, you can read it here: https://www.occ.gov/news-issuances/bulletins/2018/bulletin-2018-14.html

Topics: Financial Services Industry, Commercial Lending, Loan Pricing, Small Business Market, Credit Unions, small business, banking, financial institution, loans, consumer

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