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Small business loans: How to grab them from the "bigs"

Four-part plan should help community banks compete

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  • By  Kevin Morgan, Senior Bank Strategist for Fiserv Bank Intelligence
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At the end of last year, many community banks were expecting 2011 to bring an influx of small business loans. They built their 2011 budgets based on forecasted increases for commercial and industrial (C&I) business. At the time it seemed a prudent thing to do since economic indicators were improving. But economic trends are not the only factor.

Historically, small business loans have represented 30% of total business loans in the banking industry. Since 1993 small business loans grew 6% annually, peaking in 2008 at $711 billion dollars. However, the total is now declining. Current holdings of small business loans declined through the third quarter of 2010 to just under $631 billion and many of those assets are held by the largest institutions. The merging of big banks, in combination with the volume of business credit cards they’ve long been issuing, has resulted in less than 1% of financial institutions controlling almost 39% of small business loans.

This imbalance is occurring at a time when smaller companies are borrowing less. A January 2011 survey by the National Federation of Independent Business (NFIB) found that the single most important problem for small businesses is not a lack of credit, it’s a lack of sales. Until demand for products and services improves, the NFIB expects inventory levels, hiring, and capital expenditures to remain relatively flat.

What can community banks do? If your institution hopes to grow small business loans and deposits, you’ll have to seize existing opportunities in a highly competitive, “take-away” market. And your success will be a direct result of your execution. So, how do you effectively manage a client acquisition plan? Here are four concrete steps to take:

Step 1: Sharpen your picture of things
Before you get into an all-out, full-court press looking for small business targets, you need to honestly assess where your institution is today. The best way to begin is with a thorough SWOT analysis:

• Strengths that your bank offers, such as experienced officers or a positive reputation

• Weaknesses including any gaps in your product offerings or your lack of expertise in underwriting C&I cash flows

• Opportunities in your market, perhaps a struggling competitor that you can target

• Threats from outside forces, for example, irrational rates offered by competitors



Step 2:  Evaluate internal factors
This process involves honestly assessing your institution’s current capabilities, understanding your current client base, and analyzing your relationship management practices.

Ask yourself these questions: Do you have the people, processes, and technology in place to go after additional small business? Does your lending operation have the calling skills to ask the right questions and assess business categories that you may not have targeted in the past? If you find an opportunity, can you effectively underwrite it? Can you offer commercial deposit products that are at least on par with competitors in your market? If you answer no to any of these questions, you need to get your house in order.

Next, determine which customers you resonate well with today. Develop criteria to identify your best small business clients. It is essential to develop a small business profile based on those criteria. It will help you target prospects for your proactive acquisition efforts.

Profiling will also help you establish client plans for retaining, cross-selling and up-selling your current customer base. Remember, your best small business clients are your competitors’ top prospects. If you haven’t assigned a relationship officer to your small business depositors — not just the credit customers — do so now and prioritize based on their value to the bank. You cannot nurture and advance those clients without regular interaction so that relationship officers can uncover a gold mine in latent internal opportunities.


Step 3: Accurately assess your external market opportunities 
How many small businesses reside in your defined market area? What’s the industry mix? The concentration? Projected growth? How many businesses match your target profile? Are there any niche industries you’ve served in the past that you should consider? Are your best people situated to target your best prospects? Document your answers in an action plan.

Market analysis is often a community bank’s most challenging hurdle. Although market data is widely available, it can be difficult to get your arms around. Fortunately, there are tools that can help you find out how many C&I customers are available within your branch footprint. Then dig deeper to learn the number of businesses in specific categories where you have a strong track record.

For example, you may be surprised to learn the numbers of medical, legal and accounting offices and other small services businesses in a four- to six-mile radius of your branches. Look for market areas that have much higher concentrations than the national averages for your target businesses. Focus your new business efforts on those areas.

To expand beyond the reach of your branches consider adding remote deposit capture (RDC) to your small business plans. Many banks across the country are using RDC to their advantage, including some California banks that specialize in serving dental, veterinary and medical practices. These banks regularly visit the state’s universities and dental schools to make presentations to graduating doctors. Even the banks’ websites are geared to these professionals. The banks tweak their existing offerings to the needs of different practices — offering partner divestiture loans for example. As a result, these west coast institutions have drawn similar customers from as far away as West Virginia.

If you uncover a strong concentration of businesses in an industry your bank hasn’t focused on before, study it. Get the big picture of how that industry operates so you’ll understand what to expect in terms of underwriting and managing credit. You may not call on these companies right away, but in a few months you may be ready to make effective overtures to this new type of business.
 
 
4.  Establish a calling plan and manage behaviors
Many community banks lack a well-managed, well executed calling plan. Always be calling. But don’t stop there. If you’re not continually measuring, documenting and refining your outreach skills — and getting more effective — you’re at the mercy of competitors. Mount a consistent effort, not a hit-and-miss trial.  

As you call on small business owners, you’ll need to demonstrate how you’re going to make them money, save them money, or help them operate more efficiently. Have a thorough, open-ended discovery session with the prospect. Instead of leading with a list of products and services, mold your message to the owner’s needs. Cash management will probably resonate the most. If credit opportunities exist, you’ll uncover them. But if you go in asking, “Do you have any maturing loans that we can look at?” expect a cold shoulder.

Banks have built a culture around credit as the centerpiece of a commercial relationship. Yet 60% of small businesses don’t utilize traditional commercial bank credit. Instead they rely on credit cards, personal credit and family loans. Explain that instead of paying 12% on a credit card and keeping their personal lines tapped out, they could open an operating line of credit.

When credit opportunities surface, underwriting capabilities will be key to your acquisition push. The last thing you want is to bring in viable opportunities only to have them dissolve when they go to underwriting. Be sure that your entire institution is in agreement with your acquisition plan and your target clients.

Be specific about the company size or industry type you’re pursuing so you’ll have a comprehensive understanding about how they operate. Coordinate your sales force and underwriting very closely. Consider having the underwriters go with the calling officers to prospect meetings. This is a community effort. Everyone has to be involved.

After calls are made, debrief your staff on the appointments. Track what you’re hearing, what you’re learning and the success you’re having. Over time, you’ll even learn how many calls it takes to get a first appointment; how many appointments are likely to lead to a sale; and how long it takes a sale to develop into a full relationship. At the end of 90 days, assess whether you’re getting traction. If you’re not, you may need to shift your focus.

Finally, never lose sight of the fact that small business acquisition is serious, roll-up-your-sleeves work. It can be profitable and vastly more rewarding than just crossing your fingers and hoping for the best. The keys are to know your strengths, understand your prospects, and execute better than anyone else.
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