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B2B Lenders Versus Community Banks: The Best Service Strategy Wins

11 May 2015

There is a perceived inability or unwillingness on the part of banks to make small and medium enterprise (SME) loans.  Entering the phrase “small business loans” into an internet search engine will return any number of horror stories about banks having greatly reduced or even stopped making small business loans, or banks who took a customer’s application, fiddled around for three weeks, and then turned them down.

This alleged gap is being filled by a growing number of unregulated, non-traditional lenders of various configurations, known collectively as B2B lenders.  These lenders are using the excuses of poor or non-existent bank service to justify their intrusion into the market which has traditionally been the bread and butter of the community banker.  Whether they are founded on misinformation or not, these lenders represent a genuine threat.  They can rob community banks of much-needed loan growth at this time when there are few decent yields from alternative investments.

The advantages touted by such internet lenders as Crowd Valley, Kabbage or Lending Club usually include the following:

  • They spread their risk over a large base of “investors” and are thus less risk averse.  The resulting notes are often sold off into pools of “investors”, each of whom takes perhaps only a few hundred dollars of each loan.  The loans that turn out to be good are expected to more than make up for the ones that do not.
  • Their processes are automated.  Algorithms in computers focused primarily on credit scores and other empirical data can return a decision at the speed of light.
  • Their applications and closings are simple.  They don’t ask for business plans, debt schedules, or any of a host of other items of information that bank small business lenders know are essential to properly serving the SME relationship.

They do have other significant differences from bank lenders, many of which may turn out to be weaknesses:

  • There is no real ongoing relationship; it is all transactional.
  • There is no ongoing counseling, advice or assistance.  While some small businesses want to “go it on their own”, many look to someone as a mentor, especially when times get tough.  The small business banker has typically served in that role.
  • B2B lenders don’t know anything about their borrowers’ businesses and don’t look at borrowers’ operating results unless the borrower becomes delinquent.  Bank lenders know that by the time a borrower actually misses a payment, the chances of turning the business around and saving it from liquidation are all but non-existent.

To the entrepreneurial small business owner who is struggling to fund a startup or a growing business, there are apparent advantages to a B2B lender over a bank;

  • They’re cheap.
  • They’re fast.
  • They don’t take collateral in many cases, and
  • They don’t ask the borrower for a lot of information that borrowers don’t want to give.
  • This kind of “leaner, meaner competition” is not new.  The seasoned community bank lender has met it many times before, in the form of incursion from the money center banks and from foreign lenders who bought their way into the SME market in the US with low rates and fees.  As soon as the demand in their primary business markets was restored, these lenders abandoned the complicated, hands-on nature of small business relationship banking.  Or perhaps the originating lender in the big bank simply finished his or her rotation in the branch lending slot and moved on to greater things.  Either way, the SME customers who were won by their prices and promises then found themselves without anyone at their bank who knew them and their business and who could give them any reliable financial advice or suggestions.

The secret to succeeding against this very real threat has the following components:

Clean up your processes.

Walk through your small business loan process as if you were the applicant.  How does it feel to you?
Make your application and approval processes easy and transparent to the customer.
At the outset, provide a checklist of every document you will need.
Do whatever you have to do to shorten your approval time.
Commit to your applicant on a decision date and stick to it.
Get your costs down.  If your efficiency ratio is over 65%, you should have a major task force focused on getting it down.
Rethink your relationship management practices

Start by taking care of the business you’ve already got.  Word of mouth is your best avenue to new business.  Regardless of whom their relationship manager is, when was the last time they had a “thank you” call or visit from the CEO?
Be sure your incentive compensation plan has an increment for keeping current customers happy and doesn’t stop with just rewarding sales and portfolio growth.
Be sure your relationship managers are well-schooled and periodically refreshed in such skills as:

Financial statement and tax return analysis
Global cash flow assessment
Detecting problem loans, and
Counseling clients when signs of impending problems begin to appear.
Train your relationship managers in the art of selling against the competitor whose main advantage is price.  If the difference is 50 basis points or less, your relationship managers should know how to retain the business.
Be sure your relationship managers have time in their workday to:

Study current information from all industries represented in their portfolio
Analyze incoming financial statements
Record the results in the credit file with copies to the next higher authority in the bank
Plan and execute effective client meetings to discuss progress, operating results and future plans several times a year.
Expand your committee meetings to discuss clients and relationships among yourselves, making sure that every key customer relationship is covered by at least two people in your bank who know it well and can serve that client.
Do not try to compete on price.

You will never be a low cost provider.
Do not take deals at a loss, thinking you will make it up on the next one.
With SME clients, do not “do deals” at all:

You are in the relationship business.
If the client is not, then you might want to re-think how badly you want their business.
Do not attempt to make your processes look easy by trying to get by without all the information you need to properly understand and finance the relationship.

You are not in the same business as the B2B lenders.
You are far more than simply another form of ATM.
The B2B lenders only care about repayment of each individual transaction.  The community banker’s job is to help the client grow his or her business relationship and grow your bank along with it.  Being a real relationship banker is hard work and carries a lot of responsibility.  If done well, however, clients recognize and appreciate the difference and reward that banker with the kind of loyalty community bankers will need to survive the threat of the B2B lenders.