In the perfect economy, a long-term approach leads the way in financial decision-making. From long-game investments to long-term loans, ROI comes from betting on future gains and future growth. But in an unstable economy, long-term financial commitments pose high risk; something that the majority of the country can’t afford amid the current crisis—let alone small businesses or community banks.
Suddenly, the short term is much more appealing. Here are a few reasons to capitalize on short-term small business lending opportunities—and how it can benefit both you and your small business customers in the process.
- Lower risk
When the future is uncertain, a short-term lens is the way to go. Let go of lagging indicators of credit-worthiness such as last year’s tax returns, and shift your focus to what’s going on in the business right now. Basing your lending decisions off of real-time cash flow and sticking to short-term agreements is the best way to reduce your exposure and cut down risk. And when it comes to managing smaller sums of credit over shorter periods of time, small business customers can be ideal targets.
Even in stable market conditions, small businesses tend to require much smaller loans, and typically use them to fill immediate, short-term business needs. Think about it this way: by sticking to the short term, you’re not just settling for short-term small business customers, you’re tailoring your lending process to better fit your small business customers’ business models—something that can financially benefit you both.
- Higher margin
In addition to reducing risk, ramping up your short-term small business lending can help you increase your margins—and reap the rewards. Charge higher interest for short-term loans needed to fill immediate small business needs, whether that’s replacing an expensive piece of equipment or anything else that keeps a small business running on a day-to-day basis. Small business’ existing needs for immediate credit are urgent—and ongoing. According to McKinsey’s series of small business sentiment surveys, 34% of small business owners believe their current cash on hand could only last a month or less. By catering to these business’ short-term needs, you’ll make more money upfront than you would with longer-term loans—and you’ll bring both your bank and your small business customers the immediate cash flow they need, at the times they need it most.
- Quicker returns
Rather than fund a long-term loan for five years, short-term lending allows you to extend capital and limit exposure to only a few months. This doesn’t just mean that small businesses get credit faster, it means you get paid back faster, allowing you to make more profit off of higher margins in less time. It’s more than just immediate gratification, it’s big-picture growth. Quicker returns means you open up your bank’s capacity to extend more loans, faster—multiplying your lending volume without incurring undue risk. Increasing your short-term small business lending operations offers a fast-track for short-term survival, but it also presents a ripe opportunity for long-term growth.
Amid uncertain circumstances and an unstable economy, the best thing your community bank can do is adapt. And the lending landscape is leaning towards one, overarching trend: a short-term approach. Between reduced risk, higher margins, and quicker returns, short-term small business lending has all the components you need for crisis-proof success—it’s just a matter of whether or not you’re willing to capitalize.