Loans backed by the U.S. Small Business Administration (SBA) have seen significant growth over the last few years, with SBA 7(a) loan volume more than doubling over the last three years. While facilitating an excellent opportunity for small business owners, (SBA) lending also creates an opportunity for banks and lenders. In fact, the competitive edge gained through SBA partnerships enables alternative lenders and smaller financial institutions, like community banks, to significantly grow their portfolios, capturing some of this exponential growth. In this article, we highlight several strategies for community banks to optimize SBA lending practices.
Strategic Importance of SBA Lending
To build a stable and profitable loan portfolio, lenders are forced to weigh the benefits and risks of every funding application. By strategically implementing government-backed SBA loans into their portfolios, community bankers can approve more loans without significantly increasing risk.
Economic Impact and Community Engagement
SBA loans drive economic development at the local level by supporting small business growth. Making financing attainable for small businesses creates jobs, builds communities, and promotes economic diversification. Small businesses are also an important factor in a growing economy because the fresh ideas and local perspective of entrepreneurs drive—to the extent that small businesses produce fourteen times more patents than both large businesses and universities in the U.S. For bankers, this means more opportunity to build long-term business relationships with local entrepreneurs.
Competitive Positioning
Large banks and fintech companies tend to dominate the market, making it hard for community banks to remain competitive. But by partnering with the Small Business Administration, community banks can appeal to the underserved small businesses in their region. Entrepreneurs and small business owners often struggle to get the funding from those dominant lenders because of rigid eligibility requirements. However, by working with a community bank, businesses are more likely to meet the eligibility requirements of SBA approved lenders.
Advanced Considerations in SBA Lending
While SBA loans benefit both the community and lenders, there are some important factors for lenders to consider before partnering with government funding programs.
- Regulatory Compliance – Along with reduced risk, government backed funding brings additional regulations for lenders. The consequence of not meeting compliance requirements is the revocation of SBA-approved lender status, which can be avoided by using digital lending tools designed to simplify compliance.
- Implementation – Working SBA loans into existing policies requires additional resources to build and train staff on the unique needs of small business clients and SBA lending requirements. Community banks can balance these increased staffing demands by increasing efficiency through digital tools and platforms that can streamline the loan application and approval processes.
- Risk Management – Mitigating risk is an essential part of all lending policies. Government backed funding alleviates some financial risk for lenders, but SBA lenders are still impacted by economic trends like inflation and interest rate fluctuations. To navigate these risks, community banks must strengthen their risk management strategies to include monitoring economic trends and diversifying their loan portfolios to include several types of traditional financing options.
Integrating Technology in SBA Lending
There are several digital tools and cloud-based platforms designed to make implementing SBA lending more efficient. Most digital lending solutions are scalable, so community banks can leverage more and more technology into their lending policies at the right pace for their specific business goals.
Digital Loan Origination Systems
Community banks can manage the increased demands of SBA lending more efficiently with digital tools and sophisticated loan origination systems (LOS). These systems automate key steps in the lending process, from loan application intake to underwriting and approval, to improve data accuracy, regulatory compliance, and overall efficiency.
AI Enhanced Analytics
Advanced data analytics and artificial intelligence (AI) play crucial roles in optimizing SBA lending technology. By using AI to generate data from various sources, banks can gain deeper insights into borrower behavior, creditworthiness, and market trends. AI-driven analytics can predict loan performance, identify potential risks, and lead to a more profitable portfolio.
CRM Systems
Customer Relationship Management (CRM) Systems are programs customized to help community banks and other lending institutions manage their new and existing relationships with clients. CRM software can offer tools to track communication, manage leads, enhance marketing efforts, and ultimately increase revenues.
Strategic Recommendations
While the increased demand of becoming an SBA-approve lender may be intimidating to community banks, there are several steps they can take to support success.
- Embrace digital transformation – Remaining competitive in the SBA lending space is easier when small and community banks embrace technology by exploring new digital tools designed to improve overall efficiency.
- Build strategic partnerships – Community bankers can collaborate with fintech companies and other technology vendors to gain access to advanced technology, customized lending solutions, and increase their understanding of SBA lending requirements.
- Empower a dedicated team – Before implementing SBA lending programs, community banks should invest in employee training that details regulatory compliance, risk management, and new software or platforms.
Positioning for Success
SBA lending offers community banks an opportunity for growth, stability, and enhanced community engagement. By learning about the strategic importance of implementing SBA programs and leveraging the right technology to maximize efficiency, community banks can further diversify their current loan portfolios. A more inclusive portfolio minimizes risks for lenders through varying economic trends and stages of growth.
