Small Business Banking Considerations

By James R. Devine

Financial Institutions across the country are re-energizing their business banking efforts as a renewed interest in credit is on the horizon. There is a lot of enthusiasm for building credit relationships as the pressure to deploy underperforming deposits continues to grow. Today’s informed banker knows the average business deposit balance ($20K) is larger than the average consumer balance ($5K), and the average business loan ($225K) is larger than the average consumer loan ($25K). They also know businesses typically use a wide array of additional financial services; so the cross-selling opportunities in a small business relationship has tremendous upside potential. Business banking relationships can be 3 to 5 times more profitable than the typical consumer relationship. Successfully banking small businesses is one of the keys to sustained profitability in banking.

The question has always been, “How do you effectively bank the small business market segment?” Centralization and product standardization coupled with automated tools have enabled larger institutions to make quick and effective credit decisions. But, how has this impacted the typical small business owner? When asked, they say:

  • I like the credit decision response time.
  • I dislike being a number in a database, as it has hurt or eliminated my personal relationship with the bank.

That being said, business owners want access to credit.

They want to deal with someone who understands businesses and better yet, their business. They’re looking for business advice that will enhanced their operating performance.

There is a real window of opportunity for a financial institution that wants to step up, and provide value-add service to the small business market. Institutions that effectively address the following considerations will have demonstrated a commitment to the market, and they will win the battle.


For any financial institution it comes down to answering these key questions:

  1. For their financial service’s needs, what will make a small business owner decide to utilize your financial institution over any other?
  2. What will make the financial institution experience better, and what will induce business owners to buy additional products/services?

Building a strong long-term relationship with small business owners starts with providing reasonable access to business credit. So, what’s your plan for providing credit services? As small business owners walk into your financial institution looking for working capital support as well as equipment and facilities financing, how are you going to deliver?

Their initial assumption will be the person they’re meeting with is a small business expert, who understands how to structure business loan requests. They’ll also assume that he/she intimately understands your institution’s lending policies and procedures. Does your staff have previous small business lending experience? Have they been adequately trained? Can they walk the talk?

Federal regulations require you to review a prospective borrower’s historical financial statements and tax returns as well as current personal financial statements and tax returns from the principals. As you review and analyze this financial information, make sure your focus is soundly based on a credit provider’s point of view. Given today’s pressure and an abundance of credit opportunities, the tendency might be to let enthusiasm prevail over sound credit analysis. Don’t let enthusiasm associated with this opportunity put your institution into a ready, fire, aim mode. Make sure your people are properly prepared. Fall back on the old lending adage we teach in Hipereon, Inc’s. business banking curriculums, “The harder I work, the luckier I get!”

Good credit policy is all about managing risk from a lender’s perspective; don’t forget, you are in the lending business. You have to thoroughly understanding the operating cash flow characteristics of your prospective borrower to assess the likelihood you’ll get repaid. You are taking a calculated financial risk for a defined rate of return. There is no ownership return upside (15%-25% return) available to the lender. Your return will only be, “Prime + 2%”, regardless of how well the business performs.

Your business bankers should not be taking ownership risk for a loanership return! Your job is to assess the risk associated with getting repaid without taking ownership risk in the process. A critical part of your business banker’s job is to properly structure the loan request. The loan structure should be designed based on the borrower’s cash flow capacity to pay you back.

Your analysis of cash flow should drive the terms and conditions of the credit request. The borrower’s repayment terms must be cash flow affordable. Never forget the theme song from Hipereon Inc.’s Commercial Lending School, “If the cash don’t flow, the loan don’t go!”

Your bankers must also have the ability to communicate effectively with small business owners. The typical small business owner does not have an MBA or CPA designation after their name. So, don’t complicate your communication with technical financial terms that confuse or intimidate them. The objective is not to impress business owners with how smart you are, but to know they clearly understand what you are saying. Be practical and use a common sense dialog to develop your contact relationships.

A logical extension of this communication linkage involves education, financial literacy. Your institution should plan to provide small business owners with access to good financial management training. The better they are prepared to understand their own fiscal condition, the better credit risks they will prove to be for your institution.

If you plan to use branch personnel as part of the relationship management process, make sure you provide them with adequate training to handle this additional responsibility. The better prepared they are to act as a key small business contact, the more effective your overall relationship management and cross-selling efforts will be.

Don’t get enamored with the value of collateral. Often referred to as CRAP (Can’t Render Annual Payment) at Hipereon, Inc., collateral will always be a secondary source of repayment. Building materials inventory, semi-trucks and logging loaders will not fit into your vault. A piece of commercial real estate won’t either. Don’t over emphasize the collateral value of real estate. All you need to do is look back at what happened in 2007-2008, or to the S&L’s in the early 90’s when they became fixated on real estate collateral. As we have seen several times, commercial real estate can actually go down in value!

The real financial leverage in the small business market comes from depth in relationships. The key to stability and long-term profitability is having multiple products and services relationships in place (target at least 4). To get to this enviable position you need to get strategic, it takes nothing short of a dedicated hands-on approach. Roll up your sleeves, and go to work with your business owners. Show them you are committed.

As stated earlier, it all begins with providing reasonable access to credit. Unfortunately there is no magic formula for approaching the credit business. It is hard work that requires a thorough diagnostic assessment.

You have to develop your people to use proper analytical techniques; or you may decide to use an outsourced underwriting support service to supplement your analytical efforts and reduce some of your initial staff costs. If you go this route, make sure your service provider has the ability to quickly and efficiently spread financial statements and provide a well-structured fundamental financial analysis. You still need someone internally that can evaluate the quality of their work.

Realize they can’t do a thorough and timely job for you unless they receive all of the required information. Incomplete information will cause the process to start, stop, and start again. You will likely lose any time and cost leverage advantage if you don’t supply your outsourced provider with complete information packages up front.

It is your job to gather the necessary data and manage all of the direct contact activities with the prospect.   Expect to receive the results of their analysis within 3-5 days.

An internal or external analysis should address a prospective borrower’s; liquidity, solvency, leverage, profitability and cash flow performance. In the normal course of business, does the prospective borrower have the cash flow capacity to pay you back?

Don’t assume your outsourced provider will make your credit decisions for you. Their role should be structured to simply support your internal decision-making process. It is still your decision to make.

Make sure you keep an eye on the business owner’s perspective. They are looking for services to help them become more successful over time. They want to know you are committed to this end, and are deserving of their trust and commitment.

The financial institutions that make the organizational commitments to; build a sound foundation under their business credit services efforts will have a significant opportunity to bank the small business market. Financial institutions need to stay focused on the fundamentals, and don’t look for the quick and easy fix. Success in the small business market is an earned right.