How Do Banks Retreat From SBLs And Retain Customer Loyalty?
In the words of Bob Dylan, “the times they are a changing”, again and again and again. Over the past two decades business trends and cycles have experienced unrelenting change and disruption. Even before the 2008 credit crisis, lending patterns to small and midsize business (SMBs) began unprecedented transformation, and the rate of change is accelerating. In this volatile environment peppered with evolving technologies, increased competition and diminishing securities, how do banks best retreat from the low profit, high risk management of small business loans (SBLs), yet retain customer loyalty?
The changing financial landscape
Well before the credit crisis, community banks held the nation’s dominant share of SBLs. But diminishing interest rates and reduced profits took its toll as large banks entered low middle market lending in the 1990s. With the advantage of economies of scale and a need to enhance financial performance, large banks entered the SBL sector to increase portfolio size and performance. The credit crisis slowed this advance as banks responded by continuing to service existing customers but severely tightened credit to smaller clients. Despite this, by 2015 the global banking system reached about $350 billion in SBLs. Their aggressive encroachment upon this lending sector was eventually hampered by two influences — stricter credit regulations following the crisis and the emergence of technology based non-bank alternative lenders. The accumulative effect of these two influences plus the continuing decline of real interest rates have reshaped the lending landscape yet again. As we enter a new decade, large banks are reassessing portfolio risk and determining new strategies to protect profits. The age of large banks lending to small business is quickly drawing to an end. The commercial banking system is expected to reverse policy and exit the SBL market in large scale throughout 2021.
A new approach to servicing SMBs
As banks plan to divest themselves from small business loans, they must find a new approach to continue bolstering financial performance. A combined strategy is required — minimize portfolio exposure to high risk, low profit lending and maximize profitable revenue streams. Banks’ lowest risk, high yielding revenue comes from service fees and charges. The path forward is to terminate SBLs but retain the customer and continue servicing their ongoing business banking needs.
So how do banks tell a customer that they don’t want to service their loan anymore but do want to keep their business? The best solution is to partner with a non-bank lender to ensure the client’s funding needs are met. By providing customers with a viable lending solution rather than simply cutting them loose, it is more likely they will maintain deposit and other services at your bank.
Non-bank lenders are the solution
In most cases, banks send their troubled commercial loans to the banks Workout Group. This department’s job is to handle the negotiation and management of the bank’s forbearance agreements. Often, business owners mistakenly think that when their loan is sent to this group, that the bank is trying to work things out with the business owner. Wouldn’t it be best for everyone concerned if this was actually the case — alternative lenders can make that happen!
Alternative non–bank lenders operate in an entirely different arena than commercial banks. Supported by robust technologies and unencumbered by regulatory reporting, non-bank lenders move fast and efficiently to deliver working capital solutions to low middle market customers. Utilizing progressive underwriting techniques, these lenders are competing for borrowers with easy online applications, faster processing times, minimal documentation requirements, and funding as soon as the same day. Few banks can match this level of service.
For conventional lending institutions willing to engage in referral programs with these alternative lenders, the benefits are long lasting for the bank and its small business customers. Non-bank lenders, such as invoice financing companies have the technological platforms and access to alternative information sources to make credit more readily available to small businesses. This is particularly helpful to newer businesses that do not have the credit history required by traditional lenders. With fast, easy access to working capital, SMBs can grow operations and build a stronger business. Eventually some of these clients will develop into upmarket clients and will migrate back to the bank for large business financing.
One of the signs of great business dealings is the creation of win-win-win scenarios where multiple parties are involved in mutually beneficial relationships. Commercial banks working with alternative lenders to best service small business clients is one such example.