Joe wants to borrow some money to buy the equipment his micro-business needs to grow. Discouraged at his prospects of getting a loan from a traditional bank, Joe applies to an online lender and quickly gets approved. At first, Joe is thrilled to have the money he needs, but soon problems emerge and he realizes the online loan process was not as transparent as he thought. His business future is now even more uncertain than it was before because he’s not sure he can afford the high interest and aggressive payment schedule to repay the loan.
This isn’t just a hypothetical scenario. This is, in a nutshell, the experience of many small businesses that borrow from online lenders, as data from a recent Federal Reserve Study illustrates. The 2015 Small Business Credit Survey conducted by the Federal Reserve Banks of New York, Atlanta, Boston, Cleveland, Philadelphia, Richmond and St. Louis found that while small businesses were more likely to obtain credit approval from online lenders, they were significantly less satisfied with their experience than were those who obtained loans and lines of credit from traditional brick-and-mortar banks.
Among the key findings of the study:
- The perceived likelihood of getting approved for financing drove the decision of where to apply for companies with revenues under $100,000 per year. Price was also an important factor for micro businesses and those with revenues of $100,000-$1 million.
- Smaller businesses were much more likely to apply to an online lender — 30% among micro businesses versus 20% of all firms.
- Seventy-one percent who applied to an online lender secured approval.
- Only 15% of those who secured credit from online lenders were satisfied with their experience, while 75% of those funded by small banks were satisfied.
- High interest rates, unfavorable repayment terms and a perceived lack of transparency drove borrowers’ dissatisfaction with online lenders. In fact, transparency issues were a concern across all lenders, and nearly a third of all businesses found transparency was lacking.
Other than the obvious chance to say “Told ya so,” what does this data mean for community banks? Clearly, these numbers add up to opportunity.
Small businesses, discouraged by their chances with traditional banks, have turned to online lenders because of the relatively easy application process and probability they’ll get approved. But they quickly discover online lenders just aren’t all they’re cracked up to be — and the window of opportunity reopens for community banks to step in and fulfill the needs of small businesses.
If your community bank wants to be active in the small business space, here are some actions you can take:
- Be Responsive & Relevant. Take off your loan pricing binoculars and stop valuing loans based on what the bank down the street is doing. Take advantage of tools like Bankers Dashboard Loan Pricing Model to tailor each loan to your bank’s objectives and your customer’s unique situation. Using tools like this will also give your lenders more autonomy in pricing decisions allowing them to respond quicker with loan offerings and decisions.
- Use “community” to your advantage. Emphasize what has always differentiated small, community banks — personal service. When a small business has a problem with an online loan, who can they talk to? With their community bank, they’ll be able to interact directly with a person at their local branch level to get help.
- Offer transparency. Make sure your process and products provide the transparency small business owners demand. Just because a person is running a business doesn’t mean he or she is a finance guru. Small business owners need clearly stated product features and costs, as well as comparison tools, as much as private consumers do.
- Share your success stories. Your happy small business customers are your best advocates. Incorporate your history supporting small businesses throughout your marketing campaigns.
- Build a niche. If you want to compete in this space, make sure the market knows it. Follow through with competitive pricing, seamless processing and actual approvals of small business applicants. Use word of mouth to your advantage.
- Leverage your data. Look for patterns and history in your data to get an edge on the online lenders who don’t have your depth of experience and history in the marketplace.
So, to take advantage of more lending opportunities, start finding ways to improve the customer’s borrowing experience to give them what they need, versus only what they ask for. Do THIS to truly become the maven, the go-to business lender, in your community.