In the 1950s, diners were the heart of American communities. Families gathered for hearty meals, and waitresses knew customers by name. Then came the fast food revolution. Chains like McDonald’s and Burger King offered something diners couldn’t: speed, consistency, and convenience. While some diners adapted by modernizing their menus and service, many couldn’t keep up with the changing pace of consumer expectations.Community financial institutions (CFIs) could now find themselves in a similar position. For decades, they’ve been the trusted “diners” of small business lending, offering personalized service and local expertise. But are non-bank lenders the fast food chains of the financial world? Could they win over small businesses with their speed, flexibility, and ease of use?For decades, CFIs have been the go-to resource for small businesses seeking loans. These relationships were built on trust, local expertise, and a shared commitment to community growth. But the lending landscape is shifting. Non-bank lenders are rapidly gaining market share, offering small businesses not only competitive loan terms but also a level of speed, flexibility, and convenience.This trend could pose a significant challenge for CFIs. Small business lending has long been a cornerstone of their business model, driving revenue and deepening customer relationships. Losing these customers to non-bank competitors doesn’t just impact the bottom line — it could erode the very foundation of what makes CFIs unique.So, what’s drawing small businesses away from their trusted community banks and into the arms of non-bank lenders? And more importantly, how can CFIs adapt to reclaim their competitive edge?According to a Secured Research study, 72% of small businesses — 2K firms with annual revenues between $500K and $5MM that shopped for loans in the past 18 months — get better loan terms from non-bank lenders than from their actual banks.Even when traditional banks offered the best interest rates, non-bank lenders had them beat on a variety of other loan details. What Non-Bank Lenders Are Doing RightWith low overhead costs and fewer regulatory burdens, it’s easier for nonbanks to offer businesses good rates on loans. However, it’s more than just loan pricing that’s driving small businesses to non-bank lenders. CFIs that want to compete with non-bank lenders should consider the following perks that are driving lending relationships for their competition:
- Relationship premiums. The same research showed that banks sweeten interest rates by an average of 0.25% for long-term customers. Non-bank lenders offer an average 1.3% reduction. If you’re reviewing an application for one of your most profitable customers, you can use your data to find the right loan pricing to retain the relationship and keep it profitable.
- Repayment schedule flexibility. In the study, 84% of non-bank lenders offered custom repayment schedules, compared with just 23% of traditional banks. Many CFIs treat their customers similarly. In reality, there’s a substantial difference in financial needs and cash flow between a coffee shop that’s busy most of the time and a store that sells Christmas décor. Create automated onboarding that distinguishes between different business needs and incorporate that information into your credit decisions.
- Fewer documentation requirements. Non-bank lenders required 78% fewer documents than traditional CFIs, even in cases when the CFI is the loan applicant’s primary financial institution and already had some of the documentation they needed. Automating data collection and integrating information you already have about a current customer applying for a new loan can help you streamline your documentation needs. Tap direct connections to accounting software, payment processing, and other banking data to see an applicant’s financial situation in real time, rather than asking for large amounts of financial statements and paperwork.
- Faster loan decisions. Banks required an average of 32 days to approve or deny loan applications. Non-bank lenders needed an average of 7 days. Could you decrease loan decision time by sharing data across your CFI? Use a single platform to handle loan applications, account management, and payment processing. AI systems can offer a faster look at creditworthiness by looking at a wider data range than traditional loan applications can, offering the potential for real-time (or near real-time, when factoring in human oversight) credit decisions. AI can also automate credit risk assessment, document verification, and fraud detection. Less manual work could mean quicker decisions.
- Partnership. Behavioral analytics and predictive algorithms can help lenders spot good credit risks. Partnering with a bank or non-bank lender that has these capabilities is one way to quickly acquire them.
CFIs can better compete for commercial loans by finding ways to make the lending process faster and less document-intensive, considering flexible repayment schedules, and rewarding longtime customers with better terms.
