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

Business owners have an optimistic outlook for the remainder of 2024, according to the BAI 2024 Small Business Banking Outlook report.

“Businesses have fared better than consumers in the post-pandemic inflationary environment,” noted BAI research director Mark Riddle in analyzing the relative optimism among entrepreneurs. “By and large, businesses have passed on their rising costs to consumers in the form of price increases. So yes, their costs are up, but so are their revenues and their net operating income. Their higher optimism follows from that.”

Additionally, there are other drivers of business optimism that should give bankers reasons to be optimistic as well.

New Businesses Abound

According to an ABA Banking Journal article: “After an initial sharp contraction, new business formation accelerated past pre-pandemic levels. Average monthly business formations over the past three years, as projected by the Census Bureau, were 23 percent higher than the 2009-2019 average.”

“There is also more geographic diversity in the location of new firms. The rise of remote and hybrid work arrangements allowed many to move from higher-cost-of-living cities to other parts of the country,” the article reports.

This is good news for the banks that serve these businesses too – especially since business owners tend to have higher levels of loyalty to their financial institution.

Small business owners gave banks an average Net Promoter Score of 44, (NPS) compared to 14 for consumers, according to BAI’s Small Business Banking Outlook report. As a metric, NPS is important because it’s a gauge of customer satisfaction and ultimately, loyalty. Measuring NPS can help financial services organizations discover problems with specific customer segments, product offerings, or service levels, and benchmark performance to similar industries.

NPS scores for banks were higher in March 2024 than they were in March 2023 among all categories of business owners – doubling in many cases -- except for microbusinesses with annual sales revenues under $1 million. Those owners most closely resemble consumers in the services they seek from their banks, so the NPS scores of these proprietors would naturally be like the scores given by consumers.

Bridging the Gap Between Personal & Business Banking

Commenting on the significance of the data, Riddle said, “It’s difficult for many financial institutions to bridge the gap between personal and business banking, but it’s an important point because that personal relationship usually begins first.”

Eighty-six percent of survey respondents use the same bank for their personal and business needs. More than seven-in-10 (71%) of owners of all business owners establish their personal banking relationship before bringing the business relationship to the same financial institution, according to the BAI report.

While small business owners often start their business banking relationship with the same financial institution they use for their personal banking, banks should proactively look for ways to nurture relationships with potential business owners especially as loan demand is forecasted to increase.

Increased Loan Demand on the Horizon

With the general optimism about the economy and interest rates, banks should position themselves for an increase in loan demand by making sure they have efficient, automated, processes in place. This allows staff to concentrate on helping businesses position themselves to qualify for the credit they seek, rather than wasting their time filling in forms and performing other tasks that automation can perform much more quickly, efficiently and consistently.

Although demand for SMB loans isn’t quite on the upward trajectory just yet, changes could be coming this year, the ABA Banking Journal article notes: “With expectations for meaningful cuts in 2024, we may soon find that businesses were simply keeping their powder dry for a more favorable rate environment.”

The chances for interest rate cuts became more apparent after the Fed’s August meeting. Many of the latest job report's details leave "a little more room for confidence that we're slowing but not falling off a cliff," San Francisco Fed President Mary Daly said at an event in Hawaii, according to a Reuters article.

Many economists are expecting a reduction in interest rates as early as September. Some economists feel that there could be a second cut after the November election, with more cuts on the horizon in 2025.

Once rates drops, demand is likely to grow, so that banks that want to benefit should be ready.

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