Bank Profit and Costs for Small Business Loans <$50k

Small business loans under $50k are 40% of the entire business loan market, generating total revenue of $29 billion in interest and fees, as shown below from a Fortune Magazine study.  But community banks, which have checking relationships with these small business, provide only 10% of these loans while serving nearly 50% of the business loans over $100k according to FDIC data.  Community bank underwriting and delivery systems are not efficient for the market segment of “<$50k loans.”  Digital lending technology can allow community banks to replace unprofitable existing processes and penetrate the relationships they already have to capitalize on this large revenue growth opportunity.

Chart 1

Many community banks do not even try to make small business loans under $50k, preferring to focus their talented business lenders on larger loans.  Others make them through the branch or small business lenders, using slow, expensive paper-based processes that average costs of $2,400 per year per loan when ongoing risk rating and monitoring costs are included, according to industry research.  Community bank small loan pricing today often uses “large loan” rates out of habit and compliance consistency, but as Chart 2 below shows, even higher pricing cannot solve the excessive “cost” problem. 

Instead, underwriting small business loans must be done with digital, automated efficiency, either through branch retail channels or solely online.  Proven underwriting uses credit information on the owner and the business deposit information providing sound underwriting with losses well documented at “credit card” levels or below.  This digital-lending model lowers the cost of underwriting, delivery and ongoing monitoring while earning higher yields and fees to make the loan and relationship profitable even at higher “credit card” charge-off levels.  Finally, this pricing is much better for customers than non-bank online lenders like OnDeck that are rapidly growing in serving this market that community banks often eschew.  With digital technology, community banks can aggressively market to this segment.  Also, the banking relationships provides more compliant loans that offer a safer relationship for the borrower linked to deposit accounts and other services through online or mobile banking.

Chart 2

The Economics of Analog and Digital Small Business Lending <$50k

It is time for you to look at a digital lending delivery model for small business loans $50k and under, like MinuteLender.