Executive Summary: Banks say they want to support small businesses, but the day-to-day reality that business customers experience often differs from the words and marketing gloss of the banking industry. However, customers will expect greater alignment as they look for alternatives to their current provider. In recent weeks, the press has featured multiple stories highlighting the importance of small businesses and the renewed focus of many banks on this segment.
Late last week Ben Bernanke, Fed Chairman, said “Small business lending conditions are much tighter than they’ve been at any time in recent memory.” He went on to say that banks should not be “so conservative and so restrictive that they turn away borrowers with whom they may have long-term relationships, who they can reasonably expect to repay and to be creditworthy.” His message is simple: lend more but, no minor detail, don’t lose money.
Increased lending focus. An increasing number of banks would disagree with Bernanke’s view that small business lending is too restrained. For example, last week Bank of America announced that during the first quarter of 2010 it had lent 18 percent more to small business than in the previous comparative quarter. In addition, it stated that it expected to lend over $86 billion to small and mid-sized businesses in 2010, six percent more than in 2009. Brian Moynihan stated: “We are making every good loan that we can make.” Importantly, the press reported that BofA said that it had purchased more than $1 billion of products and services from small and mid-sized companies in 2009.
On the opposite size spectrum from BofA, as reported by the Wall Street Journal, 850 small banks, credit unions, and nonprofit groups have been designated as Community Development Financial Institutions (CDFI). CDFIs gain access to lower cost funding sources from the Treasury and Small Business Administration, among others. Much of these funds are to be used “for struggling start-ups or would-be business owners willing to tolerate the extra supervision, financial or technical training requirements and red tape that typically come with community-development loans.”
CDFI’s appear to pursue lending the old fashioned way, focusing on planning rather than credit scores and providing advice and support prior to loan approval. The head of one nonprofit said in the WSJ, “We look at character, willingness to do the work of the business and willingness to repay the loan…We’re able to do that by providing training and technical assistance which helps strengthen their request for financing.” That may be banking the old fashioned way, but it is certainly not banking today, underscoring the attractiveness of the CDFI initiative.
Community banks continue to be in the forefront of small business lending, providing outsized support for this segment. For example, a recent Miami Herald column noted that community banks generate 38 percent of all small business loans in Florida while holding just 11 percent of assets. While BB&T with $170 Billion in assets is hardly a community bank, nonetheless, it exceeds most of its peers in customer service and getting paid for the service it provides. The most recent Institutional Investor quotes the owner of a motorcycle dealership who had just received a $1.9 million construction loan from the bank. BB&T was not “quite as low-priced as the others, but they did a lot to show how much they wanted it…They came in like partners and did everything they could to help us get the deal done in a difficult environment.”
Beyond borrowing. Beyond borrowing, banks such as Wells Fargo are increasing their convenience and accessibility, for example, in the mobile banking capabilities it provides to small businesses. Its customers can now access their accounts through SMS, cell phone, and smart phone and iPhone applications.
Banks that we have worked with have focused on enhancing their cash management offers to this segment and building out their affluent banking or wealth management areas. These and similar efforts are aimed at decreasing the bank’s reliance on lending while linking the customer into the bank more closely through extensive cross-selling.
Small business as vendors. A few paragraphs above, we highlighted BofA’s emphasis on buying more from small businesses. Purchasing is one area in which banks need to examine established practices and policies and rethink them in light of two key small business characteristics: 1) its limited resources for managing complexity (and many banks operate with very complex purchasing procedures) and 2) the need for cash flow.
We recently received a letter from a sometimes client laying out its new payment policies. Consider the following from the perspective of one of your small business clients. First, the bank announced that standard payment terms would become net 45 days. The letter states, “This change will reduce [the Bank’s] invoice processing expenses and reduce the paper used in the payments process- both good things.” Good for the bank if not the vendor awaiting payment. One option for quicker payment is to accept ACH payments which will be paid in 30 days. That is a good and fair solution for both sides except for one small detail: “ACH payments include a 1% processing fee.” Therefore, in order to receive payment within the industry standard 30-days, a vendor must take a 1% haircut.
Obviously, vendors do not have to work with a particular bank. Nonetheless, the insensitivity of introducing an arbitrary charge (or having the vendor in effect finance the bank) is particularly remarkable today during a time when banks are widely being vilified by customers, regulators, and legislators.
Concluding thought. Many banks both big and small have learned that small business is a highly attractive segment and have made their banks small business “friendly” across every aspect of the organization. As illustrated above, however, other banks have a long way to go to present a unified and positive face to the small business segment. Each bank needs to examine not only its products and services but its business policies to determine if areas for improvement exist.