It’s easy to pay the cost for the traditional origination process of middle market credits. There’s plenty of margin. But what happens when the size of the business credit is smaller—say $250,000 or less? How do you generate enough money to pay for originating small business loans?
To play the small business lending game, banks must start to look at doing things differently. You can’t make it up on volume, unless you do things differently. “Differently” means an evaluation of what and how you originate. Loans to small businesses cannot, and I underscore cannot, have the same policy or go through the same process as other middle market credits. The technology needed to originate and manage a portfolio of small business loans must be engineered for that purpose. Credit scoring of small business credit typically is the answer to that question. But without enough volume to justify the statistics, how do you get comfortable with that as a tool in the process? Is it possible to make a traditional analysis efficient enough to drive costs down?
The first area to tackle is Policy. We help many small and medium sized community banks with their small business lending initiatives. Very few actually have a small business lending policy. A specific policy should put “fences” around what types of loans, collateral the bank will take, and structure of terms you are willing to accept. Product and analysis are kept within these fences. This is the only way you’ll be able to apply process improvements to drive costs down. For example, what is one of the most basic products that should exist as part of your policy? A small business credit card product with no closing documentation requirements. A small business loan policy should also dictate a potentially different path, with different requirements, to monitor and manage the portfolio.
Once a small business policy is created and adopted, applying Process Improvement is the next step. Simplify, simplify, simplify the process for small business credit. The digitization of the consumer interaction with banks is increasingly driving small business interaction expectations. The single biggest customer interaction factor is time to decision. How do you balance speed to decision with credit quality? Creation of a small business underwriting center and specialists are vital for process improvement. With specialists that can become experts in analysis and processing of small business credit requests, real efficiencies can be realized. For larger institutions, $1.5B and above, this also creates the foundation to incorporate scoring when volumes exceed 100 loan applications per month.
Not until policy and process issues have been addressed and solved should you look to apply Technology. Too often banks look to technology first. When taking a technology first approach, we have often seen so-called “projects from hell.” Many technology solution providers and FinTech companies sell technology as the silver bullet, when basic policy and process improvement are truly the heart of solving the problem. Once you address policy and process, what technology strategy should you take? There are many different approaches. Best of breed, CRM centric, business line centric. All have their pros and cons. Over the years, we’ve seen the approach with the most pros and the fewest cons is the business line centric approach. Applying technology to efficient business processes results in the greatest return and profitability of the lines of business.