Small businesses (SMBs) are major drivers of the U.S. economy. They have complex credit needs and often employ members of the local community. One would assume banks work hard to attract SMBs as clients and that business owners have a positive impression of traditional financial institutions. That is not the case.
A new report from FIS Global, a financial technology company, revealed many SMBs are leaving banks in search of better service and lower fees. So what else is behind this exodus?
Inability to Secure Loans and Financing
Many SMBs need upfront financing in order to make capital investments and secure cash flow.
Banks frequently deny loans to small business, for reasons that range from high debt-to-income ratio, reliance on a few big customers, insufficient credit or business history and the poor state of the overall industry in which the SMB works. For a small enterprise looking to grow, the experience is quite discouraging.
Challenging Application Processes
The process of asking for financing is difficult, with onerous requirements that often result in a denial.
SMBs dislike this detailed, and often futile, application process, especially when it lacks transparency. SMB perception that banks don’t want their business is actually correct: a Moody’s study from 2016 showed that 20 percent of business loan balances in 2015 were held by small businesses, down from 34 percent in 1995.
Lack of Digital Payment Solutions
It is not just inability to secure financing that has left small businesses disillusioned.
An earlier FIS Global study, from 2017, found banks did not offer the right products that help SMBs effectively run their businesses. Specifically, traditional institutions did not offer digital payments or sufficiently functional mobile banking solutions. Since more and more SMBs are run by millennials who use technology in every other aspect of their business, this disconnect is particularly jarring.
As the needs of small business owners evolve, so should the product offerings and financing solutions of banks. Otherwise, these institutions may lose out on a potentially large client base that can grow and expand with their financial tools.