In small business lending, demand continues to exceed supply, especially on the lower end of the spectrum that measures a company’s gross annual revenue. Almost 60% of loan demand comes from businesses with half-a-million dollars in sales or less – referred to as micro businesses – but only 25% of their applications fund/book, leaving them with only 48% of all booked loans and lines (see chart). Clearly, the borrowing needs of many micro businesses are going unmet.
To be sure, smaller enterprises tend to display higher risk and are therefore not always as profitable as their larger brethren. But that profitability rule generally holds only when considering the lending relationship.
In fact, when a bank or credit union secures lending, it can often be a powerful lever to gain the deposit relationship as well. And small businesses have been shown to be a highly reliable source of stable low-cost deposits, which can boost the profitability of the overall relationship. That’s because much if not most of a small business’s deposit volume is represented in the operating account, which is generally accessed through no-cost or low-cost checking.
Bottom line: Considering the entire relationship, not simply lending, FIs will discover there’s untapped opportunity in the micro business segment.
Among micro businesses, lending supply is not meeting demand,
presenting an opportunity for lenders.
Source: LendersBenchmark for Small Business Originations; baseline: # of < $250k units; YTD through 12/29/24
