Commercial FinanceCommercial Finance Blog

The Changing Role of the Commercial Banking System

During 2020 the government and the commercial banking system responded quickly and empathetically to provide assistance and credit with flexible terms to business customers. But this benevolence can’t be sustained. Current uncertainty is exposing the weakness of conventional underwriting models forcing banks to reevaluate commercial portfolios.  

As the pandemic subsides and economic recovery begins, small business companies will start the long journey back to a new normal. This continuing period of poor performance profiles and high-risk environment transforms even the most appealing small business bank customers into an underwriting nightmare.  

In 2021, banks will change roles from being distributors of  government-sponsored relief packages to advocates of ardent risk management. 

To retain customer loyalty, banks must continue to advocate for their customers’ financial well-being. As banks withdraw from small business lending, they must refocus and drive customer engagement with other value-added services. What many small business owners really want in the year ahead is advice on how to navigate the remainder of the pandemic, and how to operate in the recovery beyond that. Bank representatives need to become relationship managers and branches need to become a place for meaningful conversations and trusted advice.  

Small Business Banking Needs 

Small business employs almost half of the nation’s work force. Supporting this demographic is more than tapping into a significant market, it’s essential to overall economic recovery. At present, large businesses are getting loans at some of the lowest rates in decades while small business companies struggle just to find a lender. Without access to credit, these businesses will be unable to rehire employees, restock their shelves and drive the economic recovery that is so desperately needed.  

As the pandemic ravages social and economic conditions, it is inspiring to recognize the resilience of the country’s entrepreneurial spirit. A recent survey revealed that 83% of small businesses had an optimistic view of 2021. As encouraging as this is, we need to look ahead and anticipate the next challenge.  

The pandemic will continue to affect sales and profits well into this year keeping small business in jeopardy. Banks’ pending mass exodus from small business lending seems ill timed, in fact it isn’t. Ultimately, this opens the door to a win-win-win scenario benefiting small business clients, the banks and alternative lenders. The banking system’s withdrawal from SBLs serves to open the marketplace even further to non-bank lenders who are more than ready to fill the gap with lending solutions designed specifically for middle-market borrowers.