During the 2008 financial crisis, Millennials experienced distinct challenges, including high unemployment levels, parents losing their jobs, savings and investments, while facing their own financial hurdles. Fast forward to 2017, and Millennials manage more student loan debt than previous generations, with the class of 2016 graduates averaging $37,172 in debt, according to Student Loan Hero. Meanwhile, the cost of living continues to rise and wage growth has slowed.
Despite these obstacles, Millennials remain optimistic about their careers and finances, hoping to take greater control over their future by starting their own business. In fact, 49% of Millennials want to launch their own business in the next three years and 54% would quit their job and start a business in the next six months, given the right resources, according to America’s Small Business Development Center. Yet, the ‘right resources’ can be elusive for this generation.
A survey by Wells Fargo recently revealed that 42% of Millennials believe that banks are unlikely to give them a loan or line of credit for their small business due to their age. Still, credit and debt can be an investment for future business growth and Millennials understand this. Instead of taking on business debt and opening separate accounts for personal and business banking, Millennials rely more heavily on personal credit to launch and grow a business.
Specifically, 27% will carry a balance for business expenditures on a personal credit card and 16% will go as far as maxing out a personal credit card, according to the Wells Fargo survey. Additionally, Millennials seek help when it comes to managing finances for their small business, as a majority (52%) only feels somewhat successful in dealing with their business’s finances.
An Investment in the Millennial Dream
This is an opportunity that banks must quickly capitalize on to increase engagement with Millennials. It is a highly profitable opportunity too – the same survey also revealed that 76% of Millennials are willing to pay more for financial products and services that will help them ensure the financial success of their business.
Banks are well-positioned to help Millennials close the gap between dreaming of launching a business and making it a reality. By understanding the initial obstacles hindering Millennials from starting their own company, banks can work on removing those obstacles and build lasting relationships with new business customers.
To do this, banks must take a long-term approach and invest in the relationship. As Millennials accumulate wealth, they will encounter complex financial decisions, such as purchasing a home, investing or starting a retirement savings plan. Financial institutions should aim to advise this generation on such decisions and communicate about the consulting services they can offer.
By nurturing the relationship with ongoing engagement, Millennials will be more likely to stick with their financial institution through the process of launching a business, should they decide to do so.
Data, Digital Delivery and Fintech Alternatives Converge
This is particularly important, as almost half of Millennials consider financial stability a must before starting a business, according to America’s Small Business Development Center, and banks can help Millennials achieve this. With access to data and analytics tools, banks can segment Millennial customers based on borrowing and repayment habits, life changes and other indicators to more effectively serve them based on their financial needs.
In addition to guiding Millennials toward financial stability, banks must evaluate their small business lending processes. Before the 2008 financial crisis, banks generally competed against other financial institutions for lending opportunities. Now, the lending game is more crowded than ever, with alternative lenders gaining market share.
As the most connected generation, Millennials’ expectations have been shaped by technology and consequently, they demand a faster and more convenient lending experience from their financial institution. Alternative lenders deliver that, offering speed and convenience throughout the lending process.
Legacy Lending Processes Present Hurdles
Applying for a small business loan through a traditional bank typically takes a total of 33 hours on average, according to the Federal Reserve Bank of New York. This involves evaluating lenders, determining the appropriate credit product, completing massive loan applications, and finding and submitting supporting documentation, like bank statements and tax returns, most of which is done manually.
Once this is complete, the underwriting process can begin. To determine whether the applicant will be approved or denied, traditional banks must assess financial statements, tax returns, income statements and credit reports. This is yet another manual process that takes a significant amount of time.
To make it worse, some banks often repurpose their commercial lending technology and processes for small business loans. Small business loans do not require the customization and documentation that commercial loans require, so unnecessarily complicating the small business lending process can restrict efficiencies, further delaying a decision for applicants.
Lending to Millennials Requires Removal of Friction
Alternative lenders have streamlined the application and underwriting process, attracting Millennial small business owners. Prospective borrowers can apply for a loan online in minutes, sometimes through a smartphone, while the approval process takes days rather than months.
This level of speed and convenience can come at a premium price, i.e. higher interest rates. By modernizing lending processes and using technology to improve the customer experience, legacy banks can capitalize on small business lending opportunities with Millennials and regain market share from alternative lenders.
For a loan application process comparable to alternative lenders, offering a customized loan application online is crucial. This ensures that small business lending opportunities are not restricted to branch hours.
By streamlining the application process and offering a customized online loan application, a Millennial entrepreneur can easily apply for a small business loan at any time, using the device of their choice. Furthermore, an online loan application can save hours of manual data entry for bank employees, which lowers the cost of originating the loan for the bank and results in a much faster decision time for the applicant.
Financial institutions must also evaluate their existing underwriting practices and ensure that the underwriting department has complete visibility of each applicant. This means that banks should assess each of the customer’s accounts during the decisioning process, including personal bank accounts.
With a more comprehensive view of the applicant, the bank can determine how they are carrying debt, as Millennial entrepreneurs often rely on personal credit for their business’s needs. While this scenario is common, banks must adjust their approach to underwriting accordingly. By aggregating personal and business financial history with relevant data during the underwriting process, banks can decision loans more quickly without taking on additional risk.
A Long-Term Relationship Opportunity
Focusing on the distinct needs of small businesses and Millennial entrepreneurs while employing the right technology will enable banks to gain a competitive edge in today’s lending environment. This should be a top priority, as one in five Millennial small business owners expect to take on some form of business debt in 2017, according to a Wells Fargo study.
Millennial entrepreneurs value speed and convenience within the lending process, often paying higher annualized interest rates for the more streamlined experience that alternative lenders provide. However, banks can successfully capitalize on small business lending opportunities with Millennials by taking a more customer-focused approach and modernizing and automating lending processes to meet this generation’s expectation for convenience, speed and simplicity.