With over 33.2 million in the U.S., and representing 99.99% of all firms, small businesses are truly the backbone of of the American economy and generate $150 billion in annual revenue for the banking industry.
Although historically SMBs have been a challenging segment to profitably serve, due to diverse business needs and lower average customer deposits, banks can transform these challenges into opportunities with innovative approaches to lending and modern technology solutions.
The top four U.S. banks only claim 55% of primary business banking relationships, leaving a substantial market opportunity for financial institutions that can deliver targeted lending solutions and innovative digital products.
Why is it so important to serve the SMB customer segment?
1. Diversifying Customer Base
Banks that embrace small business lending gain significant advantages through portfolio diversification and market expansion. By serving the distinct needs of small businesses, banks can tap into a vibrant market segment that often generates higher yields than traditional commercial lending. This diversification strategy strengthens institutional resilience while creating opportunities to build lasting relationships with growing enterprises that will need expanded services as they scale. To learn more about the strategic importance of customer diversification in modern banking, read our article on why customer diversification is critical for modern banking success.
2. Empowering Entrepreneurs
Small business lending serves as a powerful catalyst for advancing financial inclusion, particularly among historically underserved entrepreneurs. Many capable business owners face systemic barriers to accessing capital, whether due to limited credit history, lack of traditional collateral, or location in underserved markets. Through thoughtfully designed lending programs, banks can bridge these gaps while capturing growth opportunities in emerging markets. This approach not only fulfills an important social purpose but also positions banks to build strong relationships with tomorrow’s market leaders.
3. Impacting Local Economies
The ripple effects of robust small business lending extend throughout local communities, creating a virtuous cycle of economic growth. When small businesses thrive, they generate jobs, increase local tax revenues, and strengthen community vitality. Local businesses typically spend within their communities, creating powerful economic multipliers that benefit the entire ecosystem. This local focus builds resilience against economic fluctuations while fostering innovation and adaptation to changing market conditions.
In order to effectively serve this group, here’s what you’ll need:
1. Alternative Lending Products
Small businesses require financial solutions tailored to their unique operational needs. Unlike large corporations seeking major real estate investments or extensive equipment financing, small businesses often need more flexible, targeted solutions. These might include short-term inventory financing, working capital lines of credit, or bridge loans to support payroll during growth phases. By understanding and addressing these distinct needs, banks can create product offerings that truly serve their small business customers.
2. Unique Credit Assessment Stategies
Small businesses often lack traditional credit documentation like years of tax returns and P&L statements. Instead of relying solely on these conventional metrics, modern lending programs need alternative evaluation methods.
leveraging alternative data sets
An example of this would be Finli’s real-time insights into business health with key indicators like monthly invoicing volume, recurring customer patterns, inventory trends, and payment reliability metrics. These current performance measures enable banks to make more informed lending decisions while supporting promising small enterprises.
3. Digital Loan Servicing Tools
Managing a portfolio of small business loans requires an efficient digital infrastructure to handle regular payments at scale. Based on your institution’s specific needs – including loan volume, customer base, and preferred payment methods – there are lots of different tailored servicing solutions.
Finli’s recurring invoice feature offers automated monthly billing that streamlines this process, with proven success supporting financial institutions. Contact our team to explore how this platform can enhance your small business lending operations.
Takeaways
Smart small business lending strategies create a virtuous cycle of growth – banks build stronger portfolios while empowering local entrepreneurs who drive community prosperity. By embracing innovative credit assessment methods and digital solutions like targeted loan products and automated servicing, financial institutions can efficiently serve this vital market segment. The future belongs to banks that recognize small business lending isn’t just about transactions – it’s about fostering lasting partnerships that help both institutions and communities thrive.
