How Small Business Owners Size Up Their Banking Relationships and the Economy

What factor weighs most heavily when small business owners select their primary financial institution? How many are thinking about switching? What types of financing are they using? And what’s their perspective on the economy? A survey by the National Federation of Independent Businesses answers these questions and more, casting light on some opportunities for deepening relationships with these valuable customers. One insight that stands out: a majority feel concerned about the health of their financial institution following several bank failures this spring yet have not received any communication to help reassure them.

Small business owners consider customer service to be the most important factor in deciding where to bank, according to a survey by the National Federation of Independent Businesses.

The survey listed five factors for respondents to rate, and 87% designated customer service as “very important,” significantly more than those who gave this same weight to a convenient location (66%), low fees (62%) and online banking capabilities (60%). Competitive interest rates were the least influential in choosing a financial institution, but still  “very important” for more than half (53%).

The trade group conducted a wide-ranging survey of its members by email in an effort to assess the relationship between small businesses and their financial institutions. The results, reported in May, were based on responses from 669 small business owners from a variety of industries, including retail, professional services, manufacturing, construction, agriculture and more.

Among the topics covered were the types of financial institutions they use, their recent borrowing activity, and their assessment of the economy from a local and national perspective. The results point to some opportunities and risks that bankers would do well to address, including lingering concern in the wake of the bank failures this spring.

Small Business Owners Often Use Multiple Banks

One clear opportunity is for financial institutions to deepen relationships with small business owners by giving them incentives to bring over more of their business and personal accounts.

Asked how many financial institutions they use for business purposes, 55% of the survey respondents said just one, 34% said two, and 11% said three or more.

The vast majority — 97% — maintain separate business and personal accounts. But a much smaller share — 56% — keeps both of these accounts at the same institution.

About a third (36%) reported that their business’ bank balance exceeds $250,000 in a typical quarter.

The Small Stick Together:

The share of small business owners who say their primary financial institution is a credit union:
1 in 10

Community banks proved to be the most popular type of financial institution among the respondents, with 67% saying they use one. Credit unions were cited by 9% as their primary financial institution for business purposes.

But the potential for switching among small business owners is worth noting. The survey found that 2% had changed their primary financial institution in the past month and that 5% were considering making a change within the next three months.

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The Borrowing Needs of Small Business Owners

Lending offers another opportunity to deepen relationships, based on the survey results. Just over half of the respondents (51%) said their small business currently has either a term loan or a line of credit, and of those, 27% said this financing is not through their primary financial institution.

The survey also zeroed in on the use of financing within different time intervals.

It listed six types of financing and asked small business owners which ones they had tapped in the past 12 months. The most popular was a credit card (70%), followed by a line of credit (33%), personal savings (32%), and a business loan (26%). Home equity and a loan from family or friends also had some takers, with each of those options being cited by 4% of respondents.

In response to a separate question, a quarter of the small business owners said they had applied for financing in the past three months, whether from a bank or credit union (19%), a finance company or online lender (3%), or another type of lender (3%).

Not everyone came away happy. Just 34% of the borrowers were “very satisfied” with the amount and terms, while 9% were “not satisfied.” The rest fell between those two extremes.

Their primary reasons for borrowing included: meeting operating expenses (34%), expanding the business (21%), replacing capital assets or making repairs (24%), and refinancing or paying down debt (8%). The remainder said “other.”

Most of those who had not done any borrowing in the past three months said they did not need to. But 3% said they had not applied because they did not think their application would be approved and 1% said the credit cost was too high.

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Outreach to Small Business Customers Is Lacking

Banking relationships with small businesses also show room for improvement in terms of communication. Just 41% of survey respondents said they talk to someone at their financial institution about the business’ finances at least once every six to 12 months.

The need for communication has taken on heightened importance in the wake of the failure of several large regional banks, at the very least to offer some reassurance.

A majority of small business owners reported that they are feeling some level of concern about the health of their financial institution, with 19% saying they are “very concerned,” 23% “moderately concerned,” and 28% “slightly concerned.” Under a third (31%) said they are “not at all concerned.”

Some Communication Please:

Seven out of 10 small business owners have some concern about the health of their banking provider. Proactive communication to reassure this customer segment would be wise.

For the majority, this is not a topic that they’ve discussed with their bankers, so some outreach could be helpful to quell these lingering worries. Only 15% said someone from their financial institution had contacted them following the bank failures, and another 7% said they had contacted their financial institution because of their concern. But 78% of the small business owners said neither they nor their bankers had reached out.

Targeting those with balances exceeding $250,000, to let them know how they could access extra deposit insurance coverage, would make for timely messaging.

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Small Business Owners Pessimistic About the Economy

The survey respondents were largely upbeat about the financial state of their business and the local economy, in sharp contrast to their view of the national economy.

A majority — 55% — think the country is already in a recession. Another 15% expect a recession to start in the third quarter, 13% in the fourth quarter, and 12% in 2024.

Asked to characterize the current state of the national economy, 58% said “bad,” 36% said “okay,” and 6% said “good.” Not even one person said it was “excellent.”

But most said they view their local economy as “okay” (48%) or “good” (33%). Only 13% said it was “bad,” and 5% described theirs as “excellent.”

The majority also gave the financial state of their business a rosy assessment: 44% said it is “good,” 30% “excellent,” and 22% “okay.”  A mere 4% said “bad.”

See the full survey results.

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