For years, small businesses have gotten very little help from their financial institutions – and no market segment gets a pass on this one. From mega-nationals to community-sized institutions, small businesses have seldom found the assistance they need. Instead, many institutions have either pushed them to retail accounts or offered these small business owners treasury/commercial services.
Consumer accounts are not adequate for small businesses. The treasury/commercial services used by corporates are largely irrelevant to an owner/operator on Main Street. One option is like being given a bicycle when an SUV is needed, and the other is similar to being given a Porsche but told to test drive it only in the city.
“Lending Local” in the Name of Economic Recovery
To bring the problem into perspective, businesses of 100 or fewer employees provide paychecks to one-third of U.S. workers. And, organizations of 100-500 employ more than half of Americans. Unlike most large corporations, these operations are fragile when it comes to something unexpected, e.g., a pandemic. Given the number of people dependent on them for work, this fragility has contributed directly to the rocketing unemployment rate in our country.
Recently, Congress passed legislation to help small businesses. The legislation made available two types of loans, one of which is 100% forgivable if used for its intended purpose. These loans are available to small business owners via financial institutions. The disbursement of funds is largely inefficient, but some money from the first and subsequent offerings did make it to their intended recipients.
Of course, some institutions are taking this opportunity to leverage the situation. Bank of America will not offer these loans unless the small business has at least one credit card. The idea is solid; the optics, however, are less than flattering…and they are not alone. In those financial institutions’ defense, administering these small business loans does present an excellent opportunity to gain more than just underwriting fees.
Lending a Digital Hand to Small Businesses
Having a small business use an institution's credit card is undoubtedly a good start, but there is more to be gained if banks and credit unions are proactive in reaching out to these entities. Given the current economic climate, there has never been a better time than now for them to revisit how they can meet the long-neglected financial needs of small business owners.
Using digital channels, institutions can reach out to small businesses sooner rather than later. Small business owners have expressed a preference for digital access for years; most run their businesses from their smartphones. Many consumer digital banking platforms offer the ability to deliver a digital banking site tailored especially to small business needs.
Tailoring services to these businesses means offering features, such as automated categorization, that create trend lines for the owners to consider, cash flow models, pro forma P&Ls, and balance sheets. Study after study shows these organizations are willing to pay for services. They are already paying somewhere - e.g., accountants, FinTechs, Quicken et al.
As is always the case, the devil is in the details. To be successful in building out a business unit that serves small businesses, financial institutions will need a dedicated set of resources focused on the effort. Additionally, the initiative will need to be led by a senior executive whose compensation is tied to the success of the endeavor. The effort must be run as a line of business, not as part of the consumer and commercial banking divisions.
The Bottom Line: During the recovery, small businesses may be (at best) a break-even enterprise. However, assisting them through this period will foster long-term relationships. Over time, these relationships could be more profitable than consumer accounts. Further, this effort will have a beneficial impact on the community banks and credit unions serve. Small businesses are the backbone of these communities and if they are lost, those communities will be diminished in a number of ways.
For more on this topic, download our free SRM Academy Small Business Brief, the latest in our Road to Recovery Series.
