Takeaways from the FDIC's Small Business Lending Survey

Headlines often focus on the Fortune 500, but small businesses account for 46% of private sector employment and 43% of gross domestic product, according to the FDIC’s Small Business Lending Survey (SBLS). Banks play a crucial role in serving these small businesses – helping them access credit and other financial services.

Yet, lending has changed drastically over the last several years, with the emergence of nonbank lenders, new technologies, as well as ongoing consolidation in the banking industry. These trends have increased competition and changed the nature of small business lending, which is why insights from the FDIC’s SBLS are especially timely today. 

This blog will examine the key findings from this year’s survey, giving bankers a glimpse into how their institution measures up to other banks across the US. 

A Universal Market with Key Differences

Most banks lend to small businesses, which typically includes loans of at least $1 million. Half of all banks make small business loans of up to $3 million. However, there are some notable differences between small and large banks in their small business lending processes. 
Community banks rely more on soft information, like loan officer assessments, when evaluating loan applications, while large banks prioritize credit bureau data for small business lending. Community banks are also viewed as more flexible and willing to lend to marginal borrowers, whereas large banks are more likely to offer small loans to borrowers lacking collateral.

Decisioning Times are Fast, Especially for Smaller Loans at Big Banks 

Community banks often involve executives and board members in approving larger small business loans. Most financial institutions—nearly 75%—use no more than three levels of approval, even for large, complex loans. For smaller loans, first-level decision-makers typically have the authority to approve them.

This streamlined approval process allows for quick decisions, especially for small loans. About 30% of banks, including over half of large financial institutions, can approve small, simple loans within one day. Additionally, 75% of banks can finalize these approvals within five business days, while larger or more complex loans are usually approved within 10 business days.

Banks looking to improve decisioning times can benefit from a segmentation strategy that leverages automation and business rules for small-dollar loans. By automating routine decisions, banks can significantly speed up processing times while freeing up relationship managers to focus on larger, more complex deals. This dual approach not only enhances efficiency for smaller loans but also allows for faster approvals on high-value transactions, improving overall service delivery.

Relationship Banking Isn’t Dead, Despite Growing Use of Technology

Banks recognize that technology excels at speeding up transactions and processing, while staff are critical for fostering customer connections—two key competitive advantages that financial institutions aim to leverage.

In fact, half of all financial institutions are exploring the use of fintech in their small business lending processes. As of 2022, 30% of small banks were already using fintech, while another 20% were in the discussion or development phase. 

Currently, only one in ten banks have a credit-scoring system capable of partially or fully automating the underwriting process for non-credit-card lending. Fewer than one in thirty banks use these systems to auto-approve loans, and less than one in one hundred banks will auto-approve loans of $250,000 or more. These statistics show that even with fintech advancements, most banks still prioritize high-touch practices, considering them essential for building and maintaining strong customer relationships.

Digital Channels Aren’t Replacing Branches Anytime Soon

Despite the closure/consolidation of many bank branches and the rise of online lending, one third of banks reported that small business borrowers are concentrated within 20 miles of a branch, and two-thirds report that small business borrowers are concentrated within 60 miles of a branch. 

So it’s no surprise that four in five banks define their lending territory based on their branch footprint. Banks rarely compete intensively with financial institutions that don’t have a branch in their market. The branch-lending territory relationship largely holds true regardless of size, top lending product, and technology use.

Clearly, banks place a high value on branch locations and on-site visits for building and maintaining strong small business lending relationships. These interactions create opportunities for personalized service and deeper connections with customers.

By integrating a digital, staff-facing application into the process, branch bankers can enhance these in-person interactions. Such tools guide face-to-face conversations by prompting bankers to offer the right products to the right customers at the right time. Additionally, they ensure that all necessary information is captured for a complete application, helping streamline the process while maintaining the personal touch that strengthens customer relationships.

Blending High-Tech Tools & High-Touch Service

Banks play a vital role in supporting small businesses, offering the resources and expertise needed to help them thrive. By balancing innovative technology with the personalized service they’re known for, banks can strengthen relationships, streamline processes, and grow their book of business. 

The FDIC’s Small Business Lending Survey provides a valuable opportunity for banks to benchmark their lending practices against industry peers, uncovering insights and potential areas for improvement. With the right mix of high-tech tools and high-touch service, banks can continue to be indispensable partners for small business success.

 

You might also like:

Blog: Business Banking Outlook is Positive: What this Means for SMB Lending

Blog: Playing to Your Community Bank’s Strengths to Win Over Small Businesses | Baker Hill

Author Bio

Baker Hill empowers progressive financial institutions to increase revenue, reduce risk, and drive more profitable relationships.

Streamline business, consumer direct and indirect lending with our common origination platform. Understand profitability and risk at every level with our sophisticated business intelligence and analytics. Monitor and maintain a healthy financial portfolio with our statement analysis, exception, and risk management solutions.

Explore our solutions below for more information on how to generate sustainable growth, minimize risk and increase profitability.