The coronavirus isn’t just a medical crisis; it’s a gut punch to the economic survival of small businesses. As businesses are forced to close for one to two months, small business owners are drawing into their cash reserves (if they exist).
More commonly, these most vulnerable of businesses are willing to approach any available lender—from government resources to community banks, large banks, and online lenders.
According to a study by Bain & Co, just 8% of small business loan applications to banks were submitted online. With social distancing rules and guidelines, this percentage will drop dramatically, with borrowers turning to online lenders. And every loan made by an online lender is one lost by a brick-and-mortar bank.
There should be a way for all U.S. lenders to efficiently and profitably deliver the financial capital that small businesses desperately need now.
The risk of doing nothing
The theory “stay in your lane” works until your operating environment takes a dramatic turn. In today’s world of rapidly evolving technology, those that stay in the brick-and-mortar lane will find themselves on the road to obsolescence. Business school case studies are filled with cautionary tales of companies that strictly adhered to one point of view only to find themselves replaced by a more innovative, tech-driven solution: Kodak vs the iPhone, Blockbuster vs Netflix.
Small businesses value the relationship they have with their community banks. But the definition of that relationship is changing. Rather than being solely defined by a physical branch, banks need to think of their business lending like their retail banking. Call it omni-channel or multichannel, the message is that connectivity broadens a bank’s appeal and opens up avenues to revenue.
Changing the relationship model
When cash is crucial, small business borrowers emphasize speed and success over lower rates.
For a community bank or credit union, the road to facilitating liquidity for small businesses—and consequently sustaining your surrounding economic environment—hinges on building a multi-channel presence. It’s easier than you think:
- Segregate small business loan requests ($10-$25K) from the commercial lending process.
- Draft small business specific credit criteria. For example, rather than request multiple years of financial statements, criteria should be more focused on recent cash flow prior to the Covid-19 impact.
- Use an end-to-end digital lending platform to automate origination (application and document upload), underwriting, servicing, and collection. You set your rules and processes, but you also automate and streamline for faster decision-making.
Even online lenders can improve their efficiency.
The winds of change were always in the air for small business lending. The coronavirus simply sped up a shift to tech-driven processes that was inevitable: rather than taking a few years, the paradigm changed within days.