Small-business lending remains a staff-driven service for banks with only 3% of banks fully automating the process, and only for very small loans, according to the FDIC’s Small Business Lending Survey released today. The survey also found that most small business borrowers are usually located within 40 miles of a bank branch.
The FDIC survey is conducted every six years, with the results from this year’s report reflecting bank responses collected in 2022 and early 2023. In an accompanying speech, FDIC Chairman Martin Gruenberg said that despite the COVID-19 pandemic leading to widespread adoption of remote communication, the survey’s results show that small-business lending still takes place largely in person, either at a bank branch or during an onsite visit.
“This doesn’t mean some things haven’t changed, particularly in the way that banks communicate with borrowers,” Gruenberg said. “For instance, the survey finds that a third of banks allow borrowers to complete at least some parts of a small-business loan application online, whether consulting about products, submitting an application or signing closing documents. However, only 5% of banks let borrowers complete the loan process entirely online. This fact, along with that of the majority of banks requiring a branch or site visit to complete the loan process, lends further support to the notion that the local branch is still a key part of small-business lending.”
A personal touch
The survey found that nearly all U.S. banks make loans of up to $1 million to small businesses, with half of banks making loans of up to $3 million. Three in ten banks, including more than half of large banks, can approve a small and simple loan within one business day. Three in four banks approve their typical loan within 10 business days.
About half of banks were using or considering using a financial technology provider in their small-business process, according to the survey. Still, the vast majority of banks engage in “high-touch practices” and believe these practices to be crucial for generating and maintaining relationships. About four in five banks define their geographic market for small-business lending based on their branch footprint, which averages about 40 miles from their branch locations.
More than nine in 10 banks often compete with another bank for small-business lending, but competition with credit unions and other nonbanks appears to have increased since the previous survey was fielded in 2016, the FDIC said. Small banks are more likely to compete with credit unions, while large banks are more likely to compete with fintech lenders, credit card issuers and other financing companies.
