With record levels of inflation and a trajectory of continued rate increases in the foreseeable future, small businesses continue to be challenged. And owners want loans to help support their businesses and plan for future growth. Lenders can help, but they also must be sure not to hurt themselves during this period of uncertainty.
How can financial institutions best understand the concerns small businesses face in the lending arena today and how can they identify ways to present financial products and solutions to best meet their needs? Or more simply, how can they maximize the client experience? Curinos believes that lenders will need extra focus when analyzing client behavior to mitigate risk amid the current economic volatility.
RISING LOAN DEMAND
Although the worst of the pandemic is likely behind them, small business owners remain concerned about the future. The Small Business Optimism Index measured 93.2 in April, the fourth consecutive month it stood below the 48-year average of 98, according to The National Federation of Independent Business (NFIB).
Despite their concern about the future, owners feel like it’s a good time to expand. The NFIB survey found that more than a quarter of them plan capital outlays in the next few months. That comes as demand for small business loan and line of credit products has increased nearly 30% year over year, according to data from the Curinos Lenders Benchmark for Small Business consortium. (See Figure 1.)
Our conversations with lenders indicate that small businesses are attempting to get “back to business” as the pandemic eases. Consequently, they are looking for sources of funding after depleting the funds they received from the Paycheck Protection Program. And high inflation is generating the need for additional small business funds to achieve their business goals.
Figure 1: Small Business Lending — Market Demand ($) — May YTD
SATISFYING THE SMALL BUSINESS LENDING NEED
The pressure and financial strain that small businesses experienced throughout the pandemic is still prevalent on their balance sheet today. When financial institutions analyze the company’s balance sheet during the loan application underwriting process and the impact of the pandemic is still apparent, the odds of that business being approved for the loan/parameters as requested are slim. This creates a strained relationship between the business and the lender. In addition, a poor client experience often leads the small business to look for alternate sources of funding via a non-traditional online lender.
When partnering with small business lending clients, financial institutions should consider the following to ensure they are both underwriting the client fairly, but also adequately mitigating risk:
- Re-evaluate the credit box. Are there more constrained rules that were put in place during the pandemic that can now be reviewed and potentially loosened in certain areas to best optimize the client’s lending experience?
- Ensure all deposits (on- and off-us) are being considered in the underwriting process to get the most well-rounded picture of the client’s financial position. Partner with a third party to develop the ability to pull off-us data within your originations system in an automated fashion to optimize the underwriting process.
- Evaluate the current rate structure on lending products. Can the lender increase rates to adequately cover risk while still remaining in the “sweet spot” (below average rates in the digital lending/fintech space)?
- Review the client’s relationship with the lender. Do they have primacy? If the borrower doesn’t have the business performance to justify the credit, the lender can assess the underwriting based on the entire banking relationship. Based on deposit balances/scoring, can the lender comfortably make a loan to the client that otherwise may not have been considered due to the client/lender relationship? More so, can the client receive a loan rate discount as a result of the primacy relationship?
This challenging economic environment isn’t going away anytime soon. In fact, it will likely become more challenging throughout the remainder of 2022 and into 2023 as inflation remains high and interest rates rise further. In order for financial institutions to best serve small business clients, an ongoing review of lending underwriting process and procedure is necessary to ensure lenders are helping small businesses meet their lending needs and overall business goals.