How to Succeed in the New Era of SMB Lending

You don’t need a crystal ball to predict what the SMB lending world will look like in 2024. You now have two years’ worth of interest rate hikes and post-pandemic trends to learn from, and taking a quick look back will help you look forward with confidence. And there is certainly reason to be confident in SMB lending’s potential. Banks are starting to realize is that SMB lending offers a major opportunity for growth, and these four key insights will help you capitalize on it.

1. More competition requires a rethink

On August 1, 2023, the Small Business Administration (SBA) added three additional types of licenses to its list of small business lending companies (SBLC), allowing non-bank lenders, including financial technology companies and alternative lenders, to start offering SBA 7(a) loans. This was the first addition to the list since the early 1980s, making this a seismic shift to the SMB lending landscape that drives up the competition for billions in potential business.

Some banks are not concerned, thinking that they can ride a wave of customer loyalty, but whether you’re talking about SBA loans or traditional loans, banks can’t rely on loyalty alone. Just because an SMB owner has a checking account at one bank doesn’t necessarily mean they will choose that bank for their business loan. In fact, roughly half of SMB owners use different financial institutions for their personal and business needs. SMB owners aren’t afraid to switch banks if they think they can get a better deal elsewhere — whether that’s on a loan, a credit card, or merchant services. The imperative is clear: there’s never been more urgency to establish strong competitive differentiators to attract and retain SMB lending customers.

2. Cutting-edge digital capabilities are non-negotiable

Over 2,100 bank branches closed their doors in the first 10 months of 2023, and did so in large part for two reasons: they wanted to reduce expenses and invest the savings into better digital capabilities. This shift to digital banking was always coming, but the pandemic put it on the fast track.

In 2024, banks will continue to develop new ways to engage with customers digitally so they can do their banking anywhere, not just where branches are – a major competitive edge in the eyes of busy SMB owners who don’t have time for brick-and-mortar banking. If you don’t have a solid digital strategy in place, you’ll fall even further behind the curve in 2024.

3. SMBs need a compass for persistent inflation

In 2023, nearly a quarter of SMB owners said inflation was the single biggest problem when it came to operating their business. Even though the rate of inflation is coming down, many SMBs have raised prices as much as they can to offset higher costs, but it’s not enough — they need more capital. Nearly half of SMB owners took out a loan between mid-2022 and mid-2023 simply to cover higher costs due to inflation, and this high demand is expected to remain through at least the first half of 2024. Banks have an opportunity to grow their footprint by providing the essential capital these business owners need.

4. Even more SMBs may have to apply for loans

The Federal Reserve has increased the federal funds rate 11 times since March 2022, leading to higher interest rates that make an SMB loan prohibitively expensive for many companies. SMB owners have increasingly turned to credit cards as their primary source of funding – SMB credit card spending was 20% higher in 2023 than it was during the pandemic – but this is not a sustainable strategy. The average monthly credit card payment for an SMB has gone up 26%, which creates a compounding financial crunch. SMB owners will have to turn away from credit cards’ sky-high interest rates at some point, and the banks that can offer a smoother lending alternative have the potential to win big.

Some banks have already realized the growing potential of SMB lending and have made it a top business priority. Others, meanwhile, have it on the back burner because they can’t envision a path to profitability. As these four insights above demonstrate, there is a golden opportunity to turn SMB lending into your performance advantage. Discover how to get ahead of the pack and make SMB lending a strong profit driver – while also mitigating risk – by downloading our resource guide, Reimagining Small Business Lending: How to Turn Challenges into Opportunities.