It’s Time to Gain Efficiency In Small Business Lending

By segmenting their commercial loan portfolios and creating a separate line of business for small business lending, many financial institutions have taken a positive step forward. But have they gained all the efficiencies possible from doing this? Probably not.

Small business and commercial lending look and feel very different and therefore need to be treated as such. Segmenting alone does not create efficiency; loan product structure, interest rates, underwriting and portfolio management are just a few areas where distinctions need to be made and efficiencies can be gained.

At Baker Hill, we know the demand persists for small business loans. What can these same financial institutions do to bring those loan requests in and process them as efficiently and quickly as the larger players?

Invest In Useful Technology

Financial institutions that are still using a template form that doesn’t connect with an existing loan origination system or that are still entering the same information multiple should considering looking at an online submission solution. These customer facing applications via the internet, like Baker Hill’s Turnkey or Branch/Intranet application, allow for the information to be gathered and input once.

Evaluate Processes and Procedures From Application to Booking

The adage “we have always done it this way” is often hindering, as the procedures for commercial and small business should be very different. Streamlining methodology for small business allows for further consideration of processes, such as comparing one year of financial statements with three years, considering tax returns vs full financial statements, and analyzing the use of credit scores over traditional underwriting methods.

Standardize Those Processes

To maximize efficiency, small business products and pricing should be standardized with little room for variance or “creativity.” In order to do so, consider developing small business centric products, basing pricing on risk, and centralizing underwriting. Depending on staffing, investor CRE may have to be housed in commercial lending. If it needs a creative structure, move it to commercial lending.

Don’t Try to Be All Things to All Customers

Certain loan and client structures fit small business, others do not. Do not try to drive highly specialized lending into the small business, it will slow the efficiency of the entire segment.

Centralize Portfolio Management

Utilizing an automated portfolio management system, like Baker Hill’s Portfolio Risk Management with its rules engine, allows for treating the small business portfolio as you would consumer. On-demand notes allow for maximum flexibility while focusing on the bottom 10% creates room for analysis. What’s more, using rules and behavior analysis to identify problems prevents sifting through mass amounts of individual small dollar credits.

Make Small Business Loans a Goal

Having a commercial loan goal is not good enough. Each originator needs a small business goal focused on loans and/or deposits for that segment.

The market needs good small business lending. Financial institutions have the ability to make these loans happen in an efficient manner. Don’t leave this segment for the big banks.

Author Bio

As Director of Advisory Services, Stephanie Butler guides the implementation and strategic consulting for new and existing Baker Hill clients. Butler coordinates the Business Process Consultant team and is responsible for analyzing client goals and objectives and providing recommendations for best practices. Relying on more than 25 years of experience within the financial services industry, she successfully maintains a client base of banks and credit unions ranging from $100 million to $100 billion in asset size.

Butler earned her bachelor’s degree in Accounting from Davenport University and received her master’s degree in Management from Aquinas College.