By all accounts, summer 2021 looks promising. Experts predict economic expansion and a consumer rebound. Restaurants are reopening to full capacity, and innovations sparked by the pandemic are here to stay.
But while the economy in general is expected to boom, many small businesses are still in recovery mode. And without an infusion of capital, they might be left in the dust.
Despite the enormous need for capital during the pandemic, the share of firms that applied for non-emergency, non-Paycheck Protection Programing financing declined from 43% in 2019 to 37% in 2020, according to the Federal Reserve’s 2021 Small Business Credit Survey.
Of course, many firms opted to apply for fully forgivable PPP loans instead of traditional loans, seeing as the second round of PPP had funds earmarked for underserved small businesses. Small businesses needed funds—and fast—yet despite the promise of PPP aid, a sizable number of them fell short of their funding needs.
Of the firms that did apply for non-emergency financing, only 37% of applicants received all of the financing they sought in 2020, down from 51% in 2019. That left a lot of small businesses in a lurch just when they needed help the most.
Other sources of financing including loans, lines of credit, and cash advances also declined in 2020. Prior to March 1, 2020, 81% of applicants were approved for at least some of the funds they sought, while after March 1, only 70% were at least partially approved, according to the Fed’s 2021 survey. And these figures don’t account for the 47% of non-applicants who reported a need for funding but chose not to apply.
The data helps shape a key chapter in the small business story: a large portion of small businesses that would benefit from non-emergency funding aren’t getting it. This happens because either the lending criteria is too stringent, or businesses face barriers to entry that deter them from applying in the first place.
Enter community banks. By understanding the unique circumstances facing local small businesses, you can play a crucial role in filling their financing gaps—and ensure they remain open to serve the communities that depend on them. Keep in mind that even if small businesses don’t meet stringent loan criteria, they might still be highly qualified for a loan. (They might even be the next Chobani.)
As the economy ramps up, businesses will need capital in order to continue serving their customers. Here’s how community banks can help meet their needs.
Lending in 2021 means being accessible and accommodating.
Expand loan criteria: As a small bank, you’re naturally worried about taking on risky borrowers. It makes sense, then, that small business loan applicants tend to be turned down due to low credit scores or insufficient credit history. But typical lending metrics aren’t really useful for determining the viability of a business that just survived a pandemic and might have amassed more debt than usual. Instead of basing a loan decision entirely on an applicant’s credit score, tax returns, or other arbitrary measures, consider expanding what creditworthiness looks like. For small businesses, including cash flow and overall assets can help community banks expand their pool of potential applicants without taking on additional risk.
Leverage current customer relations: As a small bank, you have community ties and local knowledge. That translates into trustworthiness, giving you an advantage when reaching out to current banking customers to offer pre-approvals. Have an existing merchant processor relationship with small business owners as well? Even better. With a deep sense of a client’s revenue and cash flow, you’re better poised to anticipate lending needs and potentially offer pre-approvals.
Digitize the application process: Outdated procedures can lead to higher operational costs, decreased productivity, and lost revenue. Process more loans in less time—and make sure your customers are satisfied with the speed and efficiency you have to offer. Otherwise, you risk scaring off small business owners who either fear rejection or simply don’t have time to complete paper applications.
Offer flexibility: By deploying cash faster and in small increments, community banks are better able to respond to the news and monitor the business cycles of small businesses, while also mitigating their own risk. The shorter the time between approval and loan disbursement the better—and in many cases, 24 hours is the new standard. Flexibility applies to repayment options as well: give business owners the advantages of a manageable repayment plan and steady cash flow. Plus, it helps struggling small businesses build up their credit, making them viable candidates for bigger, long-term loans down the line—and they’re more likely to stick with your bank if you’ve made their lives (and repayment) a bit easier.
The reality is that systemic barriers don’t have to get in the way of small businesses accessing much-needed funding. Small banks are primed to meet the needs of their evolving customer base, and help to reinvigorate the economy.