The playbook for profitable small-busines lending.

• Author: Heyburn, Virginia
• Position: BUSINESS-CUSTOMER ACQUISITION

SMALL-BUSINESS LENDING IS A SIGNIFICANT potential source of revenue for community banks, yet a source that many community banks have yet to fully tap. With their local roots and relationships, community banks should enjoy a competitive advantage in providing banking services to local businesses. However, large banks account for nearly three-quarters of the small-business banking market. Additionally, the growth of digital banking means that small businesses are no longer tied to their local financial institutions, and community banks face growing competition from nontraditional lenders and digital start-ups.

Community banks often struggle to attract small-business loans due to tepid loan demand and strong competition, but also because current small-business lending strategies are no longer working. Banks should address gaps in their small-business lending strategies with a playbook that includes a combination of customer intelligence, streamlined processes, transparent communication, and pricing that properly aligns with individual loan risk.

The playbook begins with the best practice of getting to know the customer. Bank staff must know what the client wants across in-person and digital spectrums and be able to explain possible alternative structures and referral options. Small businesses want a personal touch, and banks that take the time to ask questions and provide advice will be more successful than those that simply push products. Banks should partner with their small-business customers and share ideas for how the bank can help the business grow its customer base. When it comes to lending, matching the customer's underlying need with actual market opportunity is key.

Simplify the lending processes

When serving small businesses, it's important to simplify the lending process in order to encourage the completion of applications and make the process less intimidating to customers and laborious for employees. Incomplete applications present one of the most significant obstacles for business loan originations, and it's not uncommon for one in three applications to be left incomplete. Implementing standards for loan processing times can promote accountability--both internally and...