According to the latest FDIC Quarterly Banking Profile, community banks continue to thrive. As more banks turn profitable — 90.3% achieved that threshold in the fourth quarter of 2014 — community banks aren’t just competing with large, national institutions. They are competing with each other, particularly for commercial loans and other business lending. While a low interest rate for small- or medium-sized businesses will always play a critical role in the decision matrix, which institution would win if rates were equal? Competing on price alone is not likely to get bankers where they want to be in today’s environment.
Recent data from Sageworks Bank Information showed that lending to small businesses is up 2% since 2013 across all U.S. banks. This follows three consecutive years without any growth in this area. Research also revealed that many of the top small businesses lenders are community banks. In the ranking of those top 15 lenders by percentage of total loans, more than three-quarters of those were financial institutions with fewer than $500 million in total assets.
Community banks have historically been a step ahead of larger banks in relationship-based lending. They know their customers and understand their community. They often offer a level of personalized service that is difficult to replicate at larger organizations. But as competition heats up, just offering personalized service may not be enough either.
Relationship-based lending benefits both parties — lender and borrower. Some scholars have established that the longer the duration of a relationship between institution and borrower, the greater potential for credit availability and lower collateral requirements for the borrower. At the same time, establishing a relationship with a borrower increases chances of winning any future loan business that borrower may seek. Some borrowers may be willing to pay a slight premium to borrow from a bank with which they have a strong relationship. Banks should recognize that deeper, longstanding relationships can mean additional revenue from multiple product lines or loans, and the potential for referral business.
For business borrowers, there are three situations where lenders can elevate their business client relationships. The first is through business development. A key here is for bankers to communicate the added value that their institution can offer, which sets them apart from competitors. One easy way to establish that value with a prospective customer is through a brief check of how the business stacks up against its own competitors. By benchmarking the company’s industry, the lender can give the business owner more information that helps him or her better run the business. This also establishes a clear line of communication about financial performance, communication that would be helpful and necessary should the business become a client of the bank. Additionally, taking this step will better arm the lending officer with information about the prospect’s industry, which can help identify pockets of risk relevant to it, and help provide a more sound credit analysis.
Secondly, communication is equally important through the process of underwriting. It’s important for bank staff to be properly trained in not only the institution’s products and policies but also in understanding all of the new client’s needs in order to offer relationship-based solutions. When a credit analyst readily has up-to-date data on the business borrower’s financial performance, it is easy for the banker to provide additional business consulting services to help that company grow. A one-on-one meeting to discuss any potential weaknesses will offer much more to a client than just a “yes or no” loan decision. And that level of financial transparency will go a long way to cement the relationship with the client.
Finally, the act of doing more in the way of relationship-based banking goes beyond business development and loan origination. Timely business advisory meetings remain an important source of value for business borrowers and also a benefit to lenders or analysts. By offering business clients an opportunity to touch base, bankers will receive regular updates on the status of those businesses, as the business owner can communicate financial progress in addition to future plans and goals. Face-to-face interactions with your clients offer an opportunity to discuss an individual business’ needs, and an opportunity to provide appropriate financial advice where necessary. Also, the sessions can serve to identify and resolve problem loans before other indicators, like risk rating or delayed payments, show any change.
Often going further to improve relationship-based lending can be challenging due to limited personal resources at an institution. In some cases, automated solutions or data sources can help analysts and lenders by making the value-adds easy to offer, and streamlining other processes that free up more time and attention for clients.