For community banks across the country, the SMB lending landscape looks something like this: interest rates are at an all-time low, poor unit economics persist, and approval rates remain lower than average. This isn’t just a short-term snapshot, it’s a long-term reality. According to the Federal Reserve, near-zero interest rates are likely to last until 2023. In the last recession, they lasted for seven years. The bottom line? It’s a hard time for community banks to make money on small credit requests—but that doesn’t mean you can’t. It all starts with capitalizing on the factors under your control.
While you can’t do anything about the Federal Funds Rate, you can do something about your low approval rates and returns. Because for institutions like yours, a lack of small business loan approvals doesn’t just mean lower profits—it means wasted opportunity and inefficient use of resources. And right now, nobody can afford to waste time, money, and resources–especially where small businesses are concerned.
Here’s how you can create favorable economics in a near-zero interest environment, and come out on the other side.
- Recalibrate the efforts required for small credit requests.
The way you process a $50k loan and a $5M loan request shouldn’t be the same. But all too often, they are. Banks bleed profits on small business loan requests that cost the same to process as large requests but offer a fraction of the interest rate revenue—wasting resources and causing frustration. The fallout is intensified when your answer is “no,” and you’re losing profits not just on a small loan, but without any future potential.
By minimizing manual processes at any stage of the lending journey, and enabling auto-rejections or approvals for customized criteria, your loan officers can come to the same conclusion in less time and money—lowering the bar for loan profitability, increasing the chances of that conclusion being a “yes,” and ramping up approval rates without additional risk. Cutting out manual processes where you can makes the cost of processing small business loans proportional to the profit they produce—and can open up a new stream of revenue in the process.
- Cut down your opportunity costs—or close the gap completely.
Every decision has an opportunity cost. But just how big it is can vary greatly. Each time you deny a small business loan request, you’re not just leaving money on the table—you’re walking away with even less than you came in with. Why? Because of the same phenomenon that underpins #1: the cost of processing a small business loan application is far higher than it needs to be, whether it’s a “yes” or “no”. By remedying this issue and enabling your bank to say “yes” more often, (or “no” faster) you can cut down on opportunity costs and conserve capital.
If done to the full extent, with automation implemented from end-to-end, the opportunity cost of “no” can become negligible—meaning you lose nothing by turning away a small business loan request, and enter engagements with only the potential to gain.
- Lean into low-risk, high-margin lending opportunities.
In an unstable economy, long-term lending is higher risk. And as uncertainty grows, short-term lending becomes safer. Why? It’s simple: in times of crisis, nobody can say for sure if a business will still be around in five years’ time. As you turn your focus to short-term lending, you can do more than just filter out long-term requests—you can capitalize on a whole segment of customers that fall into this category by default: small business applicants.
Think of the loan a small business needs to replace a piece of expensive equipment or to purchase seasonal inventory. A substantial proportion of small business’ capital needs are short-term by nature. By taking advantage of the surge in small businesses seeking capital—and catering to their immediate needs—you can generate more leads, quicker returns, and more business in less time, accelerating approvals without incurring additional risk. Plus, you can charge more for short-term, needs-based loans, meaning you get more security and higher margins in the same deal—something rare in higher interest conditions.
At the end of the day, it comes down to this: lowering the bar for small business lending can do more than help you create favorable economics and counteract low interest rates today, it can help you capitalize on opportunities and open up revenue streams that will continue to produce profits tomorrow—and persist long after 2023.