Small Business Lending – Banking on Relationships

Small Business Lending – Banking on Relationships

Despite borrowing costs reaching new highs, the anticipated credit crunch has yet to materialize, especially for small businesses. According to an article in Reuters, 28% of firms surveyed by the National Federation of Independent Business (NFIB) borrowed on a regular basis in June. This figure was down from a three-year high in April, but broadly in the same range of borrowing activity that prevailed in the years leading up to the Covid 19 pandemic.

Yet, even with these modest improvements, it is still unclear whether the relative stability will endure, heightening the importance of relationship building. Community bankers have a significant advantage over much larger lenders when deepening these relationships with their customers.

Be Curious

One of the best ways to build a strong relationship with a small business owner is to get them talking about their business. Entrepreneurs and other small business owners are passionate about their companies. Ask them what excites them about their business.

To truly build a relationship, don’t start the conversation about the performance of the business over the last few years. Instead, focus on what the business own sees as the future for the business for the next few years and how the business owner can move the enterprise there from where it is today.

Knowing what excites them, what concerns them and plans for the future of their business will provide the building blocks for developing a deep relationship.

Use Data to Make a Meaningful Impact

One way to foster a productive dialogue with a prospective business owner is by offering to benchmark their company’s performance indicators. According to small business consultant, Chris Carlson, who was interviewed in BankBeat earlier this year, “Bankers have access to key performance ratios in numerous business sectors, either directly or from third parties, such as Risk Management Association (RMA). You could ask the prospect if a banker has ever offered to benchmark their key financial performance indicators with those of their peers,” he said. If not, you have an easy opening.

For existing customers, banks can leverage rich data available in their systems today to deepen relationships. There's a lot of behavioral data available that can provide good insights on what timely offers retail and commercial customers are most likely to respond to.

For example, if a banker comes to a business with a bridge loan when they know the business is running low on funds based on their cash flow that's going through the financial institution, then there may be more willingness to expand the relationship.

The Road Ahead

The economic environment will continue to be challenging for the foreseeable future. Interest rates may not increase any further, but in his comments in September, Federal Reserve Chairman Jerome Powell indicated that rates could go higher, but would likely not fall until well into 2024, if then. As a result, interest rates on small business loans will remain high.

Still, businesses will still need financing for various activities. By truly understanding the visions that operators and owners have for these businesses, you can build deep, lasting relationships with this valuable customer segment.