Why smaller small-business loans can be worth your while


Online lending technology is making this market more lucrative for community banks.

By William Atkinson

Community banks with assets under $10 billion have almost half of the small-business-loan marketplace of loans exceeding $100,000, but less than 10 percent of the market for loans of less than $50,000. That’s according to RCGILTNER Services, Inc. in Louisville, Ky. According to the firm, these smaller loans represent a market worth $7 billion in revenue. When loans between $50,000 and $250,000 are included, this figure balloons to $20 billion.

So why haven’t community banks been more aggressive in seeking these smaller small-business loans? Quite simply, say those in the know, the costs associated with underwriting and servicing the loans are too high, with some banks actually losing money. Many banks’ internal processes for making these loans are not efficient and cost-effective enough to aggressively pursue this market. This leaves it wide open to large banks, business credit card providers and alternative lenders, which can process these loans more efficiently and cost-effectively.

As a result, community banks have lost almost half of their market share—going from 32 percent to 18 percent—of small-business loans under $100,000 to large banks and fintechs in the past seven years, according to the FDIC. Between 2010 and 2017, for example, fintechs experienced a 1,700 percent growth rate, and large banks a 31 percent growth rate, with this type of loan. Yet community banks experienced a 21 percent decrease with these same loans.
Online lending to small businesses is one way community banks can profitably enter or re-enter this market, given the efficiency and cost-effectiveness of the technology.

But while there may be a lot of opportunity here, adoption to date has been slow. “There are relatively few community banks involved in online lending to small businesses, because of the lack of comfort level,” says Kevin Tweddle, CPA, who is group EVP of innovation and financial technology for ICBA Services Network. “It is very different than traditional community banking. For example, there is a little higher level of risk in this kind of banking than most community banks may be willing to take.”

But while there may be a lot of opportunity here, adoption to date has been slow. “There are relatively few community banks involved in online lending to small businesses, because of the lack of comfort level,” says Kevin Tweddle, CPA, who is group EVP of innovation and financial technology for ICBA Services Network. “It is very different than traditional community banking. For example, there is a little higher level of risk in this kind of banking than most community banks may be willing to take.”

Quick stat

$7 billion

Market, in revenue, for small-business loans under $50,000

Tweddle believes that more banks are watching this area and soon may look into it themselves. “One thing that will move this forward for community banks is the fact that consumers are starting to accept this technology, and nonbank lenders are starting to take a larger share of this market,” he says.

“Another thing that may move it forward is that community banks that are currently primarily niche lenders might see online small-business lending as a diversification opportunity.”

Online lending to small-business customers may not be the best option for all community banks. Robert C. Giltner is chairman of RCGILTNER Services, Inc., which offers an online small-business lending technology called MinuteLender. Giltner says the first thing community bankers should ask themselves is, “What is our business strategy for small-business loans under $250,000?”

Most community banks only do them when they have to. “They know they don’t make money on these smaller loans,” he says. “As a result, banks that do a lot of small-business lending are asking themselves how they can do it more profitably and efficiently.”

Success stories
Several community banks that have embraced online lending to small businesses are happy with the results.

“We wanted to be able to provide unsecured lines of credit and term loan opportunities to our business and consumer customers in an automated manner,” says Chip Register, senior vice president, chief administrative officer and CIO for The Fauquier Bank in Warrenton, Va., which holds assets of $675 million. “We knew they had unsecured loan needs, and we felt they were going elsewhere.”

The bank adopted MinuteLender in January 2017, and its first production loan took place in June 2017. “We use FICO scores, look at their deposit history and then use a decision rubric that has been defined by our credit department,” Register says. “Within a matter of minutes, we are able to provide them with a decision, how much they qualify for, the rate, and then give them the opportunity to move forward.” In less than a year, the bank has done almost $2 million in production.

Regaining lost ground
“Small-business customers often have short-term financing needs, and the traditional method for underwriting and processing these smaller loan requests was time-consuming and expensive,” says Matthew G. Craney, senior vice president and chief risk officer for $258 million-asset Home Bank in Martinsville, Ind. The bank realized that an automated online lending solution would provide an efficient, profitable solution for the bank and its small-business customers.

“Communication served as the primary key to success in implementing the technology,” Craney says. “Home Bank engaged staff from IT, compliance, marketing and credit during the implementation, which ensured all necessary due diligence was being completed.”

The product is still new for the bank, but Craney says it has already resulted in several loans the bank likely would not have been able to secure without the product.

Another bank pleased with the results of online lending is $992 million-asset Planters Bank of Hopkinsville, Ky., which began using Loan Express in June 2017. “We really didn’t know what to expect,” says Glenn Rodgers, senior vice president of retail banking. “However, the online loans and lines of credit have been offered for 10 months, and we currently have 88 loans with an outstanding balance of $579,222. So far, we are pleased with the results.


William Atkinson is a writer in Illinois.

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