Skip to Main Content
PCBB Banc Investment Daily October 10, 2014
Banc Investment Daily
October 10, 2014

Moving Beyond Small Business Lending

We recently heard about Exo Inc., an upstart company in Brooklyn, NY that's trying to popularize the use of insects as food for humans. Each of the company's protein bars contain about 40 crickets, which have been cleaned, dried and milled into fine flour. The bars, according to Exo, not only taste great but are good for you too. Humans have eaten insects since the beginning of the species and even today, about 80% of the human population consumes insects of some variety.
Even with that historical context, getting the average person psyched about eating crushed up crickets will clearly have its challenges. We do respect a business willing to try something different. It is also be a good lesson for banks that may be spending too much time focusing on lending to small businesses and not enough time promoting other services these customers need.
There's been a lot of chirping in recent years about whether or not small businesses really need banks anymore, particularly as a number of alternative lenders have cropped up. We're obviously biased, but we think community banks still have an important role to play. That said, we think banks need to do a better job moving beyond just lending opportunities.
A mid-year report on small businesses by the National Small Business Association (NSBA) highlights why such a shift is so important. For instance, when asked which types of financing they'd used in the past 12 months, 32% of small businesses polled cited earnings of the business, 30% named credit cards and 28% of respondents said they used no financing at all. Meanwhile, only 19% said they'd gotten a loan from a community bank or the same percentage that received funding over the past 12 months from a large bank.
The risk for community bankers is that if all you're trying to do is woo small businesses with loans, it might not the best use of your time in a good number of cases. To win and retain business from small companies, banks must do more given such extreme competition both online and offline.
It's certainly helpful when customers know the lending spigot is open, but banks also have to be able to offer broader solutions, such as small business credit cards, business checking, cash management and payroll, for instance. It also makes sense to consider what extras you can offer to entice small businesses. These might include online or mobile services that help them save time and money on tax and accounting assistance for example. Strategic planning is another important extra that small business customers want and appreciate, so that might be yet another option to consider.
There may also be a business case to focus on the have-nots. According to the NSBA study, 72% of small businesses polled felt they were able to obtain adequate financing, up from 65% who felt this way a year earlier. While it's encouraging that such a high percentage of small businesses feel they're on solid ground, simple math shows that another 28% of small businesses are struggling. This might be an opportunity for banks so it may be worth exploring.
Perhaps one day everyone will be eating insects more regularly. Until then, we think the lesson is to shake things up a bit. Even in banking, you don't have to eat bugs to know that maintaining the status quo while the rest of the world changes is a surefire recipe for disaster.