Many fintech firms’ offerings are narrow, leaving them unable to meet growing businesses’ capital needs. In contrast, most banks can work with businesses as they grow.
By Karen KrollSeveral years ago, when the owner of a small coffee company needed help applying for a Paycheck Protection Program loan, Valley National Bank provided assistance, even though she wasn’t a customer. The Valley team even helped the owner resubmit her application when the loan calculation changed, making her eligible for a larger amount.
“For a small business, those extra dollars meant she could keep someone working,” says Thais Sullivan, national director of community lending with the Wayne, New Jersey-based bank. The business owner eventually transferred her business to Valley Bank.
A recent analysis of more than 4,700 banks and credit unions by Cornerstone Advisors found that only about one in seven had a concentration in small business lending of at least 20 percent. “That’s a huge opportunity,” says John Meyer, senior director with the banking consultancy.
After all, about 70 percent of 1,265 small business owners, also responding to a Cornerstone survey, indicated they wanted to work with their local banks, Meyer says. Their challenge? It’s not always easy for small businesses to find the services they need at their local banks.
Why target small businesses?
Cultivating small business clients can pay off. About 90 percent of businesses in most countries are classified as small, and about half of employment worldwide occurs within small businesses, says Jeff Tijssen, leader of the global fintech business with Bain & Co. Yet, the market is often underserved, presenting tremendous opportunity, he adds.
“When we help smaller businesses, we help our communities,” Sullivan says. Many small businesses hire from within their neighborhoods, contributing to its strength.
While fintech firms have made inroads into the small business sector, banks can regain ground with this market, a recent report by Bain found. Many fintech firms’ offerings are narrow, leaving them unable to meet growing businesses’ capital needs. In contrast, most banks can work with businesses as they grow.
A first step: listening
One key to succeeding in the small business market is simply asking questions and listening. At CNB Bank, an “aha moment” occurred when the bank asked small business clients whom they considered their personal bankers. “We thought it would be their commercial banker or treasury management (expert),” says Leanne Kassab, CFMP, senior executive vice president and chief experience officer with the Clearfield, Pennsylvania-based bank. Instead, many said it was the associates or tellers. “They were most comfortable with our front-line employees,” she adds.
Armed with this insight, CNB focused on educating its front-line associates on the solutions that can help small business clients. “We don’t expect our associates to know everything our treasury management specialists know, but we want to make sure they know when it’s appropriate to refer a client to an expert,” Kassab says.
CNB also developed the Small Business Xpress solution for term loans and lines of credit for between $5,000 and $100,000. Applications for these can be completed online or by a branch manager in about 15 minutes, and decisions are made within a few minutes.
When marketing the bank, CNB takes care to include small businesses in its testimonials. “Some banks try to show off their relationships with the biggest players in the market,” Kassab says. However, that’s not relatable to most small business owners, she adds.
To help its small business clients prosper, CNB can connect them with a range of experts from in- and outside the bank, on subjects ranging from human resources to marketing to cybersecurity, and through events like webinars, and lunch-and-learns.
“Most people are not sitting around thinking about banking,” says Sean Hockenberry, president and chief executive officer with Financial Marketing Solutions. Banks need to remain in front of potential clients through brand awareness campaigns. Typically, the more effort a bank puts into brand awareness, the less time it can spend knocking on doors, he adds.
At the same time, most banks need representatives out in the community. “Being part of the community creates the most trust, especially in disadvantaged communities, including those with histories of redlining or being overlooked,” says Khary Bridgewater, managing principal at Crowe and leader of Crowe Beacon. Banks that participate in community events show they care and have something to offer. To foster greater trust, it helps to include minority representation when attending an event in a largely minority area, or to include women when meeting with women business owners, he adds.
Along with local and civic organizations, banks can target small businesses by seeking relevant centers of influence. So, a bank focused on independent restaurants will want to identify trade associations and other groups in the sector, Meyer says.
Once banks capture the attention of small business owners, they need to offer products designed for them, Meyer says. Trying to force-fit solutions built for large enterprises often is less than ideal. “It’s like a sledgehammer when they just need a tap,” he says.
Some small business solutions are evolving from consumer credit decision engines, Meyer says. One example comes from banks that are using utility, phone, rent and other payment records, as well as measures like credit scores and debt-to-income ratios, he says. A solution may check how consistently a loan candidate has paid these bills and use this information to help it determine whether to approve a new loan.
Some solutions use artificial intelligence to review all loans the bank approved over a period of several years. They then train the model to assess how closely loan candidates show similarities to successful past borrowers, Meyer says.
Becoming a trusted advisor
Making the leap from business partner to a trusted advisor often requires a proactive approach by the banker to inform and educate small business owners. For instance, recognizing that small business owners often rely on pricy credit cards or personal loans, banks can present information for other, potentially more cost-effective borrowing programs which they might qualify, such as options available through the SBA or other agencies, says Michael Budinger, commercial lending transformation leader with Crowe LLP. When they do, banks need to be clear about the program requirements, along with fees, terms and conditions to ensure the business owner understands them, he adds.
Within many banks, responsibility for the small business market falls on retail and branch associates, along with product managers who understand bank products. Cultivating the small business market requires an effective, coordinated team effort with a leader, typically at the director level or above, Meyer says. “You’ve got to team up,” he adds.
In 2021, Sullivan and her colleagues realized many minority- and women-owned businesses were struggling to get approved for PPP loans, often because they were not paying themselves. That prompted Valley Bank to ask Sullivan to create a department to support this sector. The community lending team focuses on providing financing solutions to women and minority-owned small businesses.
“When we looked at the industry, we realized there was a lot of need for access to capital,” Sullivan says. In September 2022, Valley Bank launched its Community Lending platform. The one-page application on the platform asks for one or two years of information on the business and its owners, which is used to apply for loans of between $5,000 and $100,000. In contrast, most other areas of the bank expect at least three years of business and personal returns.
At the same time, the bank stresses to its small business clients its focus on relationships. “We’ll tell people ‘We’re not for everyone. We’re looking for relationships,’” Sullivan says. Forging relationships with clients leads to a different, often closer bond than a more transactional approach.
Valley Bank connects its small business clients with trustworthy service providers, such as payroll services firms and nonprofits that offer financial education, Sullivan says. “We try to bring information that’s practical and can help them prosper,” she adds.
Banks that don’t reach out to the small business community are missing tremendous opportunities, Sullivan says. “Pennies grow up to be dollars,” she says. “Also, you don’t realize the warm feeling you get when you can look back on the business and say, ‘I helped them grow.’”