Loan Zone: Relationship Versus Tech Delivery in Small Business Lending

The dynamics of small business lending have been changing rapidly over the past 10 years. Owners of small businesses today probably got their introduction to lending via fintech, so it’s not surprising that small-business owners are now turning to online loan origination processes in greater numbers. Having forged their expectations as consumers of personal loan and mortgage solutions in the early 2000s, these consumers-turned-business-owners now demand the same efficiencies in the enterprise arena.

Two recent studies from the Federal Reserve Banks of New York and Cleveland point to clues regarding the nature of these businesses, as well as their preferences when dealing with financial institutions. The studies indicate that smaller businesses (those with annual gross revenue of less than $1 million) gravitate toward online lending in greater numbers than their larger counterparts. 

The most telling sign for the future, however, concerns the year-over-year satisfaction rates reported by small businesses between 2015 and 2016. Business owners participating in the New York study reported an increase of 31 percent in satisfaction with the online processes and results for that 12-month period. That is an amazing jump that should be setting off sirens in your credit union. That kind of increase in client satisfaction is reminiscent of the move Japanese auto makers made in the late ’70s against U.S. manufacturers.

According to the studies, 83 percent of the loan applicants had sales of less than one million; 48 percent of the businesses applying were less than five years old; and 54 percent were in growth mode.

The study also considered the motivation behind applying for credit. As one might expect, given the business demographics above, the majority of applicants (more than 60 percent of both online and traditional) were seeking financing for business expansion.

The studies also address business owners’ rationale for choosing online application methods over traditional ones. The primary factors for online lending applicants appear to have been, in order of importance, the “perceived chance of being funded” (64 percent), “cost” (60 percent), “speed” (50 percent) and “flexibility of product” (59 percent). In contrast, traditional lender applicants’ primary factor was “relationship” (66 percent).

Again, one of the more dramatic findings from these studies was the year-over-year satisfaction statistics. In 2015, credit unions (56 percent) enjoyed a significant margin over online lenders (15 percent); in 2016, credit unions’ satisfaction score of 76 percent was closer to that of online lenders (46 percent). The gains made by online lenders in just one year are worth noting. As a source of competition, this segment of the market is clearly getting better at its game.

While the satisfaction numbers for online lenders had grown significantly, there was also strong evidence of a continued reliance on traditional financial institutions. Clearly, businesses still view these organizations as key advisors and financial institution employees as members of their small business team. This is significant as credit unions seek to grow commercial lending and commercial real estate portfolios in the years to come.

So, what can we learn from this data? 

During the last seven years, entrepreneurs have been showing a preference for greater efficiencies through the deployment of online and mobile technologies. At the same time, as indicated by these surveys, relationships are still of significant importance. In other words, they want it all. They want their financial institution to meet them where they do business, which is increasingly online. But, they also still seek a friendly advisor who knows their business. 

My question for you is, why not give them both? Lending platform technology is currently in a state of rapid development and evolution. In the coming months and years, you will see traditional for-profit financial institutions utilizing this technology to effectively compete against online-only lenders while creating an even stronger lender/borrower relationship. The world of commercial lending is evolving—is your credit union equipped for the change?

Patrick True is risk manager in the lending solutions division of Jack Henry & Associates, Monett, Mo.