Solving One of the Biggest Problems in Business Banking

3 min read • Aug 01, 2014 • Adam Shiflett

In banking, you start to get used to saying “No” to small business loans. With strict qualifications and government regulations continually tightening, saying “No” is becoming even more prevalent. Do you know what it’s costing you?

Everyone agrees, your first responsibility is to protect the deposits of your customers and make sure they are invested in the right opportunities. So when someone doesn’t fit requirements it is pretty easy to say “No”. However, the person at the other side of the table represents more than just a loan payback.

Understanding Small Businesses Total Client Value

A study from Novantas shows that a business’ Customer Lifetime Value (CLV) is five times higher than the average consumer. The combination of higher average deposits and other additional financial services makes businesses a major contributor to your success.

When a small business comes in your office looking for a loan it’s important to not just evaluate their loan qualifications, but also their CLV. If you have to turn them away you may be losing more than just the loan revenue. In a recent Lendio survey, we found that 74% of small business borrowers would switch banks to get a loan.

When you turn down a small business loan, the first thing they do is look for other sources. A Harvard study found small business owners usually search three options—which will most likely include your competitors. If they secure the loan with one of them, you are very likely to lose their current and future deposits along with other financial services.

Customer Lifetime Value Doesn’t Change the Facts

Customer Lifetime Value for small businesses is an important variable to consider, but it can’t change your qualification requirements. It’s true that small businesses are five times as valuable, but they are also more risky, so much so that you have to turn away 90% of them.

Lending to under-qualified borrowers is a risk you cannot take, but the danger of losing a customer because of a turndown is also a serious concern. These factors are driving lenders to adopt new relationships and form partnerships with organizations that are beneficial to banks and their under qualified customers because they can accept the risks associated with lending to less-than-perfect borrowers.

Finding New Ways to Say “Yes”

Smart bankers are looking for new ways to mitigate the risk of losing the business of under-qualified small business owners by partnering with lending companies with lower lending criteria. By partnering together with other companies, banks are effectively increasing their lending envelope without having to adjust their appetite for risk appetite. Although the bank is still not servicing the loan, they are helping their customers find a solution to their needs—and keeping their deposit relationships.

This approach helps the bank influence the next steps their customers take to find a loan. Instead of showing a customer to the door, so that they continue on to their competitor’s door, banks are able to refer customers to a partner that is working with them instead of trying to steal them with lower rates. By helping the under-qualified businesses, banks are able to develop their customer relationships until the business is better qualified.

This is an initiative that progressive banks are taking to protect their current book of business. Over the past few months, business-lending news has been full of banks looking for ways to retain relationships with clients who fall just outside their lending criteria. As an example BBVA Compass partnered with OnDeck to provide additional loan options to businesses that fell outside their criteria.

Selecting a Partner

With the goal of your bank to keep customers, it’s important to partner with the right company. There are really two different types of providers to consider:

  1. Single Product Solution: These are companies that specialize in one specific type of lending product. Since they focus on one type of loan they generally have very fast turn around on applications and approvals. OnDeck, Can Capital and Hawkeye are great examples.
  2. Marketplace Providers: These companies create networks of lenders a bank can leverage to provide multiple loan options. The benefits here include more options in one place, allowing the bank to service a wider envelope of qualifications and needs. Lendio is a great example of this type of partner.

In either approach it’s important to make sure the company you partner with has a good reputation. All long-term partnerships are based on trust and a good partner will help you improve your customers’ experience.

Losing customers should never be an option, but neither should approving high-risk loans. Finding new ways to assist under-qualified businesses helps you protect your book of business and grow into the future as companies graduate into better qualifications.


Adam Shiflett

Adam has a passion for telling stories with data. He has helped organizations identify opportunities to improve their business operations through collecting and analyzing data. He contributes concrete approaches that help improve businesses' performance and grow their bottom line.