Overcoming Growth Challenges in Small Business Lending

There are competitive advantages that are inherent and competitive advantages that are created. The most effective tacticians in business recognize this and use data analytics to guide the implementation of strategies that bridge the gaps threatening long-term growth and survival.

In boxing matches, shorter fighters are normally perceived as disadvantaged competitors because taller fighters naturally have longer reach, making it easier for them to establish a striking range, land punches quicker and keep good distance to hold opponents off. This, of course, makes things difficult for shorter fighters, but height and reach aren’t the only keys to success. Effective training, strategic positioning and solid execution can help shorter fighters optimize their footwork, timing, hand speed and striking power to use their competitor’s strongest attributes against them.

For business owners in need of cash, there are a myriad of financial institutions competing for their business. A commercial bank is usually first in mind when it is time to take out a business loan or line of credit because, after all, traditional banks often have more advanced technology and digital services for customer use, offer the convenience of multiple branch locations and a large ATM network, and provide a more robust selection of financial products, including investment accounts.

While credit unions offer many of the same financial services as big banks, including business loans, business and personal checking and savings accounts, vehicle loans, mortgages, personal and business credit cards, and the ability to bank from anywhere using online and mobile banking, these institutions are often overlooked due to their smaller size and membership requirements based on affiliation and geographic location. Moreover, the existence of credit unions is shrouded by an overall lack of awareness that is exacerbated by larger banks with substantial marketing and advertising bolstering their market presence and keeping them at the forefront of consumers’ minds.

When it comes to small business lending, credit unions are still in their infancy, compared to their larger bank counterparts. And, with fintechs emerging as new leaders in the lending market, credit unions may be inclined to resign themselves to the belief that they can’t compete with the resources and reach of these lenders.

However, credit unions have untapped advantages to deploy – and win – in this space. Banks and credit unions may share some similarities, but they have several differences that give credit unions an edge and make them an increasingly advantageous avenue for small businesses looking to secure funds.

A report by the Small Business Association indicated that over 99% of all businesses in the U.S. are small businesses. They create 66% of new jobs and deliver 43% of gross domestic product (GDP). Yet, two-thirds of these business owners feel underserved, misunderstood and unappreciated by their primary bank.

According to recent market data, the small business need for access to cash continues to be strong, with market demand for lending products increasing by nearly 60% year over year. Much of this growth in demand resides in the unsecured line of credit product, which comprises over 50% of the total market volume.

Small business clients are applying for a lot more than they are receiving from lenders, who are using more caution given unstable economic conditions. Average approval rates for all except the unsecured loan product appear favorable in the space at 37%; but, as of October 2022, average approval loan amounts are down $70,000 from last year. Where cycle times have remained static for unsecured loans, they have increased 75% on secured products from 35.8 calendar days required to book a loan to 62.3 days.

Forced to contend with the impact of inflation, supply chain disruptions, labor shortages and lower consumer spending, small business owners are becoming a lot less optimistic. With the rising cost of supplies, goods and services, 51% report increased spending in recent months to maintain, upgrade, acquire and repair capital assets such as equipment, vehicles and facilities.

For credit unions, a great opportunity exists to serve the needs of current and prospective small business members. Like banks and other lenders, credit unions offer a variety of different loan options targeted at businesses. But, unlike their competitors, these not-for-profit organizations are not required to pay state and federal taxes, allowing them to provide more value to their members by charging fewer and lower fees on business accounts, paying higher dividends on deposit accounts and offering extremely competitive loan interest rates to their members, often beating out the rates offered by banks and online lenders.

Because credit unions are small, community-oriented financial institutions where account holders are also technically owners, there is a strong emphasis on putting their members’ needs first. This means that banking with a credit union is more of a relationship than a business transaction – a relationship that can be leveraged over time as business needs evolve.

Business loans can be difficult for any business to obtain, but credit unions are uniquely positioned to use local market knowledge to adequately evaluate small businesses based on their size, growth stage and organization type as opposed to applying a one-size-fits-all approach that views most applicants as risky.

Not only do small businesses keep the economy running, with the primary industry focus consistently remaining on health care, professional services and construction, but they also reflect the diversity of the U.S. population. Women own 36% of small businesses, veterans own 9% and people of color own 14.6%. This includes 2.3 million Latinx business owners, 1.9 million Black business owners and 1.6 million Asian business owners.

Credit unions have always played an essential role in communities, supporting overlooked populations, non-traditional industries, and people who may not otherwise have access to loans and other financial services. Relationship-based banking is a powerful way to cultivate strong, ongoing engagement with small business owners to better understand the business climates in the communities they serve.

No other financial institutions are better equipped to help local economies grow and prosper through active collaboration with small businesses than credit unions. For small business owners who value community, affordability and long-term investment, the appeal of an organization advocating for their financial wellness is certain to outmatch a long arm.

Lindsay Burkhalter is the Director of Consumer & Small Business Lending at Curinos, a New York, N.Y.-based global data intelligence business serving global financial institutions across lending, deposits and digital banking solutions.