In early 2020, the Paycheck Protection Program (PPP) promised financial relief for hurting businesses amid the coronavirus pandemic. But while businesses across every sector anxiously looked forward to funding, the reality is that only a small number of business owners actually received the capital they needed. For 85% of those that did get relief, the funding took more than 15 days to arrive—and for many businesses, the amount received covered only a fraction of their needs. 

So small businesses turned to community banks for non-PPP aid instead. But compared to past years, banks provided much less capital than previously, despite the obvious need to stimulate economic growth. The component small banks are missing is that this doesn’t just hurt those seeking loans, but it can impact their bank’s revenue and growth as well. 

In this post, we’ll dive into the numbers—and explore how small lenders can lend more efficiently (and intelligently) to stay both profitable and competitive in 2021. 

The 2020 lending landscape

In November of 2020, as the pandemic ravaged businesses, small banks approved just 18.3% of business financing applications—while in November of 2019, the same small banks granted more than half (50.5%) of funding requests. 

As small business loan applications were turned down by the dozens, nearly 100,000 businesses permanently shuttered their doors. With the proper funding, a percentage of these businesses could’ve potentially weathered the storm. Looking ahead, according to a U.S. National Small Business Association survey, over 50% of small businesses are very concerned about the impact of the second-wave of the coronavirus pandemic. 

2020 saw that when banks needed to lend with their own money, they were tighter with their lending—partially due to risk factors, partially due to the cumbersome nature of lending to small businesses using a commercial process—ultimately making it harder for businesses to get the money they so greatly needed. This phenomenon isn’t just hurting business owners, however—for banks, a low lending rate means you’re leaving revenue and profits on the table.

The right questions—and where to find your answers

Banks need to prepare themselves for the post-PPP world, starting now. With a new year of goals on the horizon, the questions you’re likely considering are:

  • How can I increase my assets? 
  • How can I grow my revenue? 
  • How can I expand my market share? 

What you should really be asking is: can my bank really compete and meet customers’ needs by only approving 18% of loan applications? If the answer is no, know that there’s an improved way to lend to small businesses, and it starts with examining your small business lending processes. 

2021: technology as your lending competitive edge

The barrier to small business lending is systemic. The two glaring issues are: 1. Small businesses are often evaluated by large business criteria (i.e., a commercial process), and 2. Application intake and evaluation is done manually. This makes the process costly and leads to low approval rates. 

When small businesses need relief most, be in a position to deliver it to them. Digitizing your small business lending, from the application process to repayments, means customers can get funding quickly. A digital platform also gives you greater flexibility to institute the lending criteria relevant to small businesses, painting a more complete picture of creditworthiness. The opportunity to distribute more high-quality loans means you can increase your revenue significantly. 

As we look at 2021, small banks and credit unions can play an important role as we seek to reinvigorate the economy. The year is ripe with opportunity for the small banks that seize it.