Earlier this year, you probably strengthened (or built) relationships with small businesses in your community by providing Paycheck Protection Program (PPP) funding. But those funds dried up quickly—and some of those businesses are now wondering what’s next.
With COVID-19 cases climbing, a looming second wave of lockdowns, and colder temperatures on the horizon for much of the nation, struggling small businesses may face yet another series of setbacks before the end of 2020. Though PPP is poised to return in 2021, there’s no telling precisely when the program will be reauthorized or how second-wave funds will be allocated and distributed.
While the Dow’s recent uptick reflects economic growth in some sectors, it doesn’t necessarily reflect the economy of small businesses. And indeed, many are facing an uphill battle: almost half (46%) of PPP loan borrowers also anticipate needing additional financial support over the next 12 months, and nearly a quarter (23%) of small business owners say they will have to close their doors if the current economic conditions do not improve over the next six months, according to a July 2020 survey from the National Federation of Independent Business.
If your funding to small businesses effectively came to a halt with the first round PPP, then it’s time to reevaluate your responsibilities under The Community Reinvestment Act (CRA).
Your obligation to small business customers extends beyond PPP. The CRA encourages community banks to meet the credit needs of small businesses in the communities where they operate. That includes low- and moderate-income communities, where there is often a significant need for credit.
Despite a great need for funding among small businesses, extending a helping hand and filling in the gaps between rounds of PPP is easier said than done. Small business lending in the current climate of economic uncertainty is considered higher-risk, as outlined in this McKinsey report.
But that perceived risk is largely overblown. Here’s why.
Busting small business lending myths
When community banks and lending institutions refer to the high risk of lending to small businesses, what they’re often saying is that the payment structures of loans available may not be ideal. First, the terms of small businesses loans can heighten risk unnecessarily. A three, five, or even seven-year loan term simply doesn’t make sense in today’s environment. However, shorter-term loans for 12 months or less can lower the risk for lenders.
What’s more, the lending process itself can be burdensome (and, therefore, costly). Small business loans traditionally require in-person appointments at one stage or another. But branches closing or reducing hours nationwide (combined with the risk of COVID exposure) makes face-to-face appointments unfeasible for many entrepreneurs.
Timing also plays a role in risk. With traditional small business lending, loan payments are often made on or near the first of the month–but that means loan payments are often competing with payroll, insurance premiums, and other payments that are often made around the same time.
As small businesses tread water in a challenging economic environment, they want to focus their energy on their customers—not navigate a clunky loan application process or committing to unfavorable loan terms.
Here’s how community banks can pivot.
Optimizing the customer experience
The solution to mitigating risk—and delivering much-needed funding—is simple. Make it easier to do business with your small business customers by going digital, and it will pay off in dividends. Implementing the following measures can help you support more small businesses in the midst of economic uncertainty.
1) Automation: Manual approval, underwriting, and servicing processes aren’t just inconvenient for customers—they’re cumbersome for your team. With postal service delays, fewer workers at brick and mortar branches, and cutting-edge fintech tools, it no longer makes sense to lend using 20th century processes. Adopting an end-to-end small business lending platform can make it easier for you to deliver financial relief, automating as much or as little of the process you’d like. For certain customers and loan sizes, funding can be granted almost instantly—leaving your people available to continue serving customers directly.
2) Efficiency: As the pandemic has accelerated the digitization process in industries across the board, many small business owners have come to expect the same remote accessibility from their banking institutions. They want efficient online applications and a swift approval process. Digitizing your small business lending ensures you get customers an answer more quickly, and whether it’s a ‘yes’ or ‘no,’ they’ll know where they stand in a timeframe that makes sense.
3) Reduced risk: Daily electronic payments delivered directly to small businesses over the life of a loan can mitigate the risk to lending institutions. And unlike a large lump sum every first of the month, the slow trickle of funds can help small businesses maintain a consistent cash flow throughout the month.
Across the country, small businesses are struggling, and lenders need to step up rather than abandon them. In this time of need, community banks can play a critical role in the success of local businesses in their direct communities. After all, the strength of local business goes hand-in-hand with the success of small banks.