By Evan SparksSmall business loans are the bread and butter of banking—especially for community banks. Loans to non-farm businesses and commercial real estate loans account for just under half of community bank loans, compared to 38 percent for the banking industry overall.
But as business lending remains a critically important part of the community bank portfolio, small businesses are increasingly in the hands of younger, less seasoned business owners and entrepreneurs—many of whom are looking outside of the banking sector for their growth capital.
Approximately a quarter of millennials—those aged roughly 18 to 36—earn income from a business in which they own a stake. This could be anything from a side hustle as a website developer to Mark Zuckerberg as CEO of Facebook. To clarify, numbers from a Wells Fargo survey indicate that about half of millennial small business owners have at least one employee besides themselves; 16 percent of them employ at least six people.
The vast majority of millennial business owners started their own businesses, and three quarters are in a startup phase or a growth phase. As they grow, though, few—less than one in five—are relying on commercial financing from banks. And in the future, more than half of these younger business owners say that new digital financial tools and nonbank offerings mean they will be less likely to use a bank.
A need for speed
Ryan Wilson is co-founder and CEO of the Gathering Spot, a private city club near downtown Atlanta that caters to younger professionals and entrepreneurs. With a restaurant, event rental space and co-working zone, the club—opened in 2015—is a modern rethink of the longstanding tradition of center city member clubs. And yet, when he was in startup mode, “we didn’t feel like banks had a good understanding of our business,” even though “what we were building would have been a good candidate for bank financing [with] tangible assets. But we didn’t get that far in the process.”
As a result, Wilson relied on a $3 million equity raise from private investors. The Gathering Spot has quickly proven a hit in Atlanta, and Wilson is looking to expand the concept in cities like Charlotte, Houston and Dallas. When asked about whether he would consider working with a bank for future financing, he explains that the club now has “a track record that a bank could study,” but that “I could see us going forward without a bank.” He adds that his club customers—overwhelmingly younger business owners and entrepreneurs—are approaching their financing the same way that he did, “looking for private investors, and not having much interaction with a bank at all.”
Why not? It all comes down to transparency and speed. “We felt like underwriting was a black hole,” he explains. “And if it was going to be a ‘no’ [from the bank], we wanted to get to that point quickly.”
Dutch McNeal and Sam Sports have a very different business but a similar perspective on the need for speed and transparency. In 2009, the University of Georgia graduates purchased an insurance agency in Waycross, a small town in rural south Georgia. They worked with a local community bank on financing to purchase the company, but McNeal said that at the last minute before closing, the bank pulled the deal. “It wouldn’t hurt my feelings from day one if they said, ‘I don’t think that’s going to work,” he explains. “They strung us along.”
“There’s an idea that as millennials, we can’t take the ‘no,’” adds Wilson. “No is fine! We just want to get there faster.”
McNeal and Sports ended up raising funds from family members to purchase the agency, but they later turned to another community bank for an asset-based note to pay back the family loans and a property loan to expand their business. They worked with a thirty-something banker they got to know through the Jaycees, and he has won all of their loan, deposit and trust account business.
“We probably could have gotten a little better rate somewhere else, but I wasn’t even going to talk to anyone else, he was just so good to us from the get-go,” says McNeal. Sports adds that it’s a “good mutual relationship,” with both bank and agency sharing referrals with each other.
Loyalty is a big theme for millennial business owners. Eight in 10 prefer to do all their business banking with one institution, so banks can win long-term business with early openness. “For an entrepreneur in the early stages of the business, if a bank shows any amount of confidence, I would personally stay there,” says Wilson.
Opportunities for bankers
Beyond greater transparency about the lending and underwriting process, and a faster turnaround, younger entrepreneurs want to see a willingness to listen and be open to innovative business models. “If we were opening a Subway, one of the banks told us, ‘I would do this deal all day,’” Wilson says.
Another opportunity: retirements. There are “lots of aging owners and they don’t know what they’re going to do when they retire,” McNeal says. For the millennials who would be good candidates to, as he and Sports did, buy these businesses, the biggest hurdle is “thinking you can’t get financing.”
Bankers also have an opportunity to become trusted financial advisers for their business customers. Right now, according to the Wells Fargo study, only 10 percent of millennial entrepreneurs say their banker is a “major influence” on financial decisions, and just 3 percent say he or she is the “biggest influence.” And yet, for McNeal and Sports, because of the trust they have in their banker—and the trust he placed in them—they view their banker as their “gatekeeper” on big financial decisions.
The expertise that seasoned lenders bring is attractive too. “I would actually prefer to work with someone who has a little more experience,” says Wilson. “Given some of the challenges we’re facing [in business growth], I’d like to talk to someone who’s seen that scenario before.”
Millennial entrepreneurs face many headwinds, from a sluggish economy to student debt burden to a harsher regulatory environment. By taking time to listen, speeding up processes wherever possible, increasing transparency and being open to new ideas, business bankers can ensure that access to bank financing doesn’t become one of those headwinds.