Can speed help make small-business loans profitable?
Of all the things Dave Seleski wants to do at his bank this year, none ranks higher than slashing origination costs for small-business loans.
"Making it attractive to where a lender can handle a $200,000 loan request without having to spend hours and hours underwriting and preparing it — that's really what our focus is in 2017," said Seleski, the chief executive of Stonegate Bank in Pompano Beach, Fla.
Seleski views the issue through the prism of time required to underwrite a credit. Right now, the number of hours falls somewhere between 36 and 48 — way too many, he said.
"When you're a small community bank, you kind of treat every client the same. As you get bigger, you've got to come up with some efficiency," Seleski said. "It's taking the same amount of time to underwrite a $100,000 loan as a $10 million loan. That doesn't make any sense."
If reducing the approval time on small-business loans is not a priority at other community banks, it should be, said Charles Wendel, the president of Financial Institutions Consulting in New York.
With a $100,000 loan, "the typical bank is either making no money or breaking even," Wendel said. Making such small loans profitable is very difficult because of all the fixed costs, "and if anything costs are going up."
Wendel estimates that banks can lose as much as $600 a year on a $100,000 loan. As a result, "many banks have moved away from lending to small companies or making small loans," he said. "That's a problem because small business needs banks and banks need small business."
Seleski, 51, founded Stonegate in March 2005 with a single branch. In the years since, he's built it into a $3 billion-asset regional bank with 23 branches dotting South Florida's coast.
Stonegate has not done badly at all for a startup, remaining profitable even during the financial crisis. Through the first nine months of 2016, it earned $19.9 million, up 12% over the same nine-month period in 2015.
But its returns on assets and equity, at 1.04% and 8.75% respectively, are both slightly below average for banks with $1 billion to $10 billion of assets, according to statistics from the Federal Deposit Insurance Corp. That's due in part to substandard returns on small-business loans.
"It's just critical we take the amount of man-hours we're spending on these loans and reduce them dramatically," Seleski said.
His plan is straightforward: automate as much of the lending process as possible using software from a vendor.
The goal is to be able to deliver an answer on loan applications in less than two weeks. As things stand, it can take more than twice as long to give a yes or no, Seleski said.
But for many smaller banks, the kinds of off-the-shelf software programs Stonegate is evaluating might be too expensive. "If you digitize your process and take a lot of the hand-holding out of it, that would lower the cost. Problem is, most banks are incapable of doing that," Wendel said. "It takes a lot of time, money and expertise. Small banks don't have any of those things."
For these banks, the answer may lie in a partnership of some sort with nonbank small-business lenders or technology providers, Wendel said. The collaboration could take the form of a "white-label" approach where an alternative lender, operating behind the scenes, evaluates prospective borrowers and provides credit to those that fail to meet the bank's underwriting standards. Or a bank could license a company's technology platform to lend online, Wendell said.
The $452 million-asset Sutton Bank in Attica, Ohio, took that approach, when it partnered last year with RCGiltner Services of Louisville, Ky., to launch a digital platform that enables it to speed up approval and delivery of business loans under $50,000.
But Seleski sees fintech lenders as more of a threat than a potential partner. "Fintech is getting to be a bigger competitor," he said. "Once they figure out their funding side, it's going to be very difficult to compete with them."
The growth of these lenders is one of the factors pushing Seleski to make process improvements.
"If they can give an answer to somebody in 48 to 72 hours — albeit at a higher price — I think we've got to speed up our response time," he said.