As recently as 3-4 years ago, small business owners were advised to cultivate longstanding relationships with a single bank. The idea was that the longer you partner with the same lender or financial institution, the more they get to know you, and thus, the easier it is to qualify you for credit. They would work with the same loan officer for all business and personal matters such as mortgage, payroll accounts, retirement planning, and credit cards. But times have since changed.
A New Trend is Emerging
Total dependence on one bank or financial institution for handling all business deposits, withdrawals, checks, savings, credit lines, loans, credit cards, and so on is rapidly becoming a thing of the past. Diversification in business banking is the new standard for the small business community, and banks are realizing that they’ll have to compete harder in order to retain their customers. Tighter banking regulations after the credit crisis of 2008 have forced banks to pay more attention to their underwriting standards and the quality of their loan portfolios. This has caused many banks to become more focused on compliance rather than expansion.
Meanwhile, more nimble and less regulated online lenders are gobbling up market share at an astonishing rate. Many small business owners find the convenience of online rate shopping and comparisons incredibly valuable to save both time and money. That includes everything from the best interest rates on money market accounts to the cheapest credit card processing services.
They are taking the same approach when it comes to the most affordable business loans for equipment leasing, inventory buying, short-term capital requirements, and other needs. If they want a cash infusion to ramp-up for holiday sales or to open a new location, the average business owner is no longer using just their local bank. The business owners of today are shopping with lenders who can give loan approval responses in a matter of hours and fund loans in 48 hours – versus lag times of 30 to 60 days for traditional banks.
The Millennial Influence
Young entrepreneurs play a big part in fueling the engine in today’s small business world. According to MillennialBranding.com, Millennials are more likely than other generations to study majors related to entrepreneurialism. Of all generational business owners, Millennial business owners report they are doing best of all, and this younger demographic relies heavily on online interaction. Millennial entrepreneurs expect their financial institutions to connect with them online and use new technology to expedite their loans and other transactions. Understandably, banks that cannot meet that demand are getting left behind.
Many of the newer online lending platforms, for example, partner with local banks who provide the official regulatory compliance necessary to be a lender. Then, they attract borrowers via online marketing. When you apply for a small business loan online, the site you are using may not be a lender at all, and may instead be acting as a portal for banks and investors who are looking for borrowers, also known as a third-party.
What Will Local Banks & Credit Unions Do?
Many smaller and local financial institutions are in the beginning stages of developing an online presence in order to compete in this increasingly crowded and competitive market. Some of them are even partnering with online-only lenders to act as an affiliate or referral source. Those that refuse to accept the times have changed won’t likely be around much longer.
The competition to win loyal customers is beneficial to small business owners who prefer to choose their banking relationships based on the bottom line for affordability and convenience.