Solving the Small Business Dilemma

May 18, 2015 at 7:14 PM

Excerpted from BAI Banking Strategies, March 27, 2015 by Rolland Johannsen and Mary Beth Sullivan.

Serving small businesses effectively requires business practices, organizational constructs, and value propositions targeted to this particular market segment.

For years banks have recognized that the small business market represents a significant opportunity to drive both balance sheet and earnings growth. The reasons are straightforward:

  • The small business market is large and growing. Currently there are over 28 million businesses categorized as “small,” representing more than 90% of the total number of businesses in the U.S. Moreover, 500,000 small businesses are created every year.
  • Small business relationships can be more profitable on average than most consumer relationships. Deposits can be significant and are concentrated in non-interest bearing accounts while loans tend to carry higher interest rates than larger commercial credits, contributing to attractive margins.
  • Small businesses also are strong prospects for a broad range of value-added fee services.
  • Small business owners and their employees tend to be attractive consumer customers, offering further growth opportunities.

Despite these compelling reasons to focus on small business as a strategic imperative, success continues to elude many banks
that try to achieve meaningful market positions and results with traditional business models and approaches.

Managing Across Business Lines
The key is to agree on a small business definition that helps scope the size of the market, provide insight into critical customer needs, and build appropriate product and distribution capabilities while maintaining enough flexibility in implementation to accommodate individual customer situations.

For a long time there has been considerable debate on whether small business is a retail or commercial business. Unfortunately, the answer to this debate is “yes;” most small businesses are both, which makes it difficult for them to fit within a traditional bank’s organizational structures and constructs.

The sales and service model must be managed in a way that cuts horizontally across business lines, rather than within a vertical organizational silo. Successful banks understand this and build their product set and distribution capabilities accordingly.

Easier Access to Credit
Less than 40% of small businesses borrow; even fewer subject themselves to most banks’ small business credit processes. Many will use other forms of credit such as home equity loans or even credit cards to provide capital. The use of non-bank, alternative lenders is also growing rapidly.

One of the most important elements of winning in this market is understanding the true nature and scope of the risks involved in small business lending and creating highly streamlined application, decisioning, and funding processes that enables targeted customers to access credit easily and quickly.

Small business remains one of the most potentially lucrative segments in banking. Creating the right business model for the customer is key to winning with this segment.

Eileen Sullivan

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