Small-business lending is in need of an overhaul at most community banks. Right now, the lending process tends to be paper-intensive, cumbersome and inefficient for both borrowers and bank personnel. Yet the simple economics of small-dollar loans suggest that the process needs to be streamlined and highly automated without sacrificing customer service.
As it stands, prospective borrowers are required to provide far more documentation than is necessary for prudent underwriting. It is not uncommon for banks to employ the same application and underwriting processes for all loans, regardless of the size or complexity of the request or the risk profile of the borrower.
An often-heard complaint among commercial relationship managers is that a credit request to purchase a commercial vehicle is more complicated and takes much longer to arrive at a decision than an identical request to purchase a consumer vehicle. Consequently, front-line staff spends too much time shepherding these small-dollar loans through an unnecessarily complex process rather than focusing on business development or activities that provide value to the customer.
This is clearly a bad business model for community banks that are already struggling to find ways to lower operating expenses. The modest revenue from a small business loan must cover credit losses and expenses for marketing and business development, underwriting and servicing activities.
Moreover, the credit process is crucial for customer retention and acquisition. Dissatisfaction with credit services is among the main factors that lead small businesses to switch their primary banking relationships, according to fourth-quarter 2014 survey data from Barlow Research Associates. The survey also found that the number of days banks spend responding to a credit request is longer than what small business customers expect.
A more efficient, customer-friendly process for small-dollar commercial loan requests is thus a matter of competitive necessity. One need only look at the rapid growth of online small business lending platforms as a portent of new competitive standards. While these platforms vary in the size of the businesses they serve and the funding options they provide, they all emphasize easy online application and low documentation requirements, quick funding and underwriting, and monitoring adapted to the online world and the risk profile of their small business borrowers.
While some bank executives might question the long-term sustainability of these business models, it is clear that these nontraditional providers are utilizing technology to simplify the borrowing process. In so doing, they are changing competitive standards for convenience and responsiveness.
Many bankers instinctively look toward technology as a solution to the problem. And indeed, there are several reputable small-business loan origination systems that can automate workflow. However, before deciding on a technology solution, it is important to address basic issues related to the design of the overall lending process.
Among the issues that must be addressed are the size of the credit requests that will be subjected to the expedited process, the appropriate underwriting criteria and the role of score-based decisions. Banks must also consider the importance of local decision-making, the approach to loan renewals and the lender's responsibility for ongoing customer relationship development. There are many other issues to consider and they are all interrelated. It is important to recognize that there is no one right way to address these issues, as the process must reflect the credit culture and competitive approach of each bank.
Small businesses represent a vital customer segment for community banks. Profitability considerations, customer expectations, and competitive developments demand that executives rethink how they deliver credit to this segment. A properly designed process will enable them be more efficient without becoming just another commodity provider in the eyes of their customers.
Claude Hanley is a partner at management consulting firm Capital Performance Group, LLC.