Banks Turning To Small Biz Lending

NEEDHAM, Mass. - Credit unions have relied on the fact that banks tended not to be interested in smaller business loans, but that is beginning to change, according to new research by TowerGroup.

A recent TowerGroup study found that U.S. small business loan balances increased at a compound annual growth rate (CAGR) of nearly 7% between 2001 and 2005. In addition, small business loan volume-that is, the number of loans made to this sector-grew at the dramatic rate of 14.3% from 2001 to 2005.

Small business lending is a balancing act for financial institutions, Tower Group said, given the wide variations in credit needs among smaller organizations. For example, originating small business loans under $100,000 closely resembles consumer loan application processing-with underwriting relying on consumer credit bureau data, automated decisions, and standard legal documents.

In order to capitalize on the growth opportunities in an increasingly competitive space, banks will need to address the following:

* Invest in systems that fully automate the small business lending process and speed straight through processing. These systems can reduce costs by 30% to 40% and result in a one- to two-year return on investment.

* Participate in the Small Business Administration's (SBA) loan programs. In order to take advantage of these programs, banks must be compliant with the SBA's origination, documentation, reporting, and servicing requirements. Several loan origination systems support SBA lending and can ease the burden of compliance.

* Find effective ways to use data gathered during the origination process to cross-sell additional bank products to small businesses, particularly deposit and cash management services.

* Integrate small business loan origination across delivery channels. Small businesses are looking for consistent information and functionality from all bank channels.

For info: www.towergroup.com.