Are you a small business owner or about to step into the small business market? Perhaps you’ve heard from colleagues that the small business banking space is anxious with dangers for the unwary. The motive of this article is to dismiss some common misconceptions about Small Business Banking. In the light of above tensest made count down lists an art form, here the top 5 misconceptions of small business lending.
5. Small Business Isn’t Impacted By The Economy
Small businesses that have a weak hold on business dynamics fail fast in a slump. To endure a collapse, many small businesses slow down growth or halt growth all together. They wait for the return of customer financiers before recommencing growth plans, which means they stop seeking new or extra sources of credit and pay down debt. While small businesses weather the economic storm, you may see some reduction in your small business portfolios.
4. Small Business Lending Isn’t Impacted By Compliance
Many small business financiers wish this were true! You need to know all of your regulators and your country’s rules that govern small business lending. Develop strong partnerships with your internal compliance and legal sectors. Check with both groups before making any changes to your Small Business Banking practices.
Don’t overlook customer focused banking rules that speak to individuals and how they are clear. Individuals own sole proprietorships and limited partnerships, so regulations precise to individuals may apply.
Many countries have guidelines governing the following:
• Fair lending
• Data security and transmission
• Model management
• Permissible purpose
• Adverse action
• Risk-based pricing
• Capital allocation calculation
• Stress testing
If you are a multinational organization, be especially aware of home/host regulations.
3. Small business lending is expensive and unprofitable
Small business lending is only expensive if you don’t have the right tools in place. You’ll need:
• A sound product strategy
• Lifecycle management
• Automation to streamline costs
One of the best ways to control costs is to implement a data acquisition policy to categorize what data optimizes your choice making ROI by specific sub-segments within your decision making process. When you have low exposures, do you really need costly business office data, mostly if the business in question is very small or very new.
Supposing you have the right tools in place, your small business portfolio can be as much as 30 percent more profitable than your customer portfolio. Your success will rise if you’re able to win the personal banking business of the owners and employees of your small business banking customers. Recall Small Business Banking is grounded in relationship building.
2. Small business banking is the same as commercial banking
Many unsuccessful small business bankers fail because they consider small business banking the same as commercial banking – just smaller. In reality, they have little in common. Small business banking is akin to lots of rolls of the dice with smaller dollar amounts at stake.
Many small business owners co-mingle their business and personal finances, so it’s important to evaluate the owners’ personal credit in support of data driven decisions. As much as 80% of risk identification can be found in the owner(s) information and this percent increases as the size of the business decreases!
The important lesson for small business bankers is that they too can take benefit of data, analytics, policy development and assessment, and automation to render the best decision at each stage of the lifecycle and to do so in a cost actual manner. Small business bankers should take the best banking practices from their retail shops and apply them to small businesses. When the experience becomes larger, small business bankers can apply best practices learned from commercial banking to improve the decision making process and tighten their risk control by including judgmental components to their process but in a methodical and organized fashion.
Now finally, the top small business lending misconception…
1.Bankers need to see complete audited financials, business plans and walk the property before execution a decision.
About 95 percent of small businesses are truly small or very young. They’re fighting to survive while growing their business at the same time. Many do not have any type of financial statements to speak of, let alone accountants maintaining their books. Ask many small business owners to give you a business case, and you’ll get blank looks. They have no idea how to build one.
If your organization needs multiple years of audited financials, business cases, branch managers paying on-site visits, etc. for your small business consumers and prospects, you will need to be ready to see you’re most creditworthy small businesses go away with their business. Would you require these time consuming and costly activities for a 200,000 customer line of credit? Of course not, because it would take too long to make a decision. So, why would you require it for a 200,000 small business line of credit?
So what’s the answer? Preset credit risk assessment is the way to go. You may have some losses, but don’t lose sight of the bigger success picture. Low exposures allow you to control and price for risk and automation allows you to book as many viable applicants as possible.