Remember the “Great Recession of 2008”? While the economic pains it caused you may only be a sore memory, many feel the effects today. For example, there are 4.1 million minority-owned companies with little or no access to traditional business credit and financial tools.
Even worse, following the recession, local and regional banks left lower-income communities. Over a decade later and they still have not returned (I think we can safely say they won’t.). And now, with the lasting economic and social impacts of the pandemic, those businesses have even more need for what your institution offers.
Your institution can help while growing revenues and loyalty.
That’s the purpose of this article. We’ll help you:
- Discover these underserved businesses in your own community
- Understand how they benefit their local economy
- Identify their unique needs
- Learn who, if anyone, is fulfilling those needs
- Describe the opportunities for your institution to grow while making a difference
Finding Underserved Businesses
An underserved business is often found within inner cities or rural areas, where traditional banking is less prominent, and economic growth is lagging. They are owned and operated by women, minorities, veterans, tribal groups, and other populations.
Source: Council on Underserved Communities (CUC), an advisory group to the SBA.
Economic Impact
You may be thinking these are “Mom and Pop” businesses. Some are, though the big picture is a lot, well, bigger.
According to the Minority Business Development Agency (MBDA) The State of Minority Business Enterprises report, minority-owned firms generated more than $661 billion in annual sales while employing approximately 4.7 million people in the U.S.
The MBDA also named this group the fastest growing business sector in the domestic economy.
And for some, they do so without the financial tools and credit you take for granted.
Why is that, and how can you help? We get to that below.
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Small Business Needs
After the 2008 decline in local and regional banks, access to credit by entrepreneurs fell dramatically. This disproportionately affected underserved communities and the firms serving them. Watch this challenge being discussed at the 2018 Milken Institute’s Global Conference.
A decade later, and it’s still an issue. While underserved communities are most affected, remember, any effort to assist them will also benefit other small businesses. And since they make up 99% of the country’s 28.7 million businesses, that’s a big opportunity, too!
Remember, nearly every business wants:
- Access to affordable capital
- Better controls on their cash flow
- Checking accounts that can enhance their business
How is your institution addressing this market need?
According to J.D. Power, nearly 63% of small business owners feel their bank does not appreciate or value their business. Why? It appears financial institutions, on the whole (and, I’ll be honest…maybe yours!), are not providing the service lineup and opportunities desired by small businesses.
Here’s some missteps:
- Financial institutions deny 80% of small business loan applications using traditional methods (FICO score or credit agencies)
- Financial institutions cannot provide next-day access to deposited funds (legacy systems could be to blame)
- Traditional checking accounts offer unchanged services while charging fees and limiting use
You’re reading this. So you’re listening. Together, we will meet the needs of underserved small businesses.
What are their other challenges?
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Business Loans
According to the 2019 Small Business Trends, a report by Guidant Financial and Lending Club, 33% of small business owners say cash flow is their biggest concern. Yet, if they apply for financing, there’s an 80% chance they’ll be denied.
Why is it so hard for small businesses to get financing?
- Lack of collateral
- No or poor credit history
- Weak cash flow
- Increased regulation
- Fewer community banking choices
- Smaller loan amounts (less profit potential for institution)
- Poorly prepared forms
These are tough challenges for any small business to overcome. If they’re a startup, they have little credit history to offer and likely less collateral. Even after a few years of operation, most small businesses struggle to meet the requirements.
And remember, it’s even worse for underserved owners and communities.
The missteps described in the previous section mean financial institutions are not meeting market demand. That opens the door for FinTechs and other non-banks to address the need.
FinTech Lending
If you’re a small business owner, a few clicks (or taps) at an online lender can get you loan offers from $500 to $250,000. Given this covers 70% of small business needs, that’s a substantial market.
FinTechs offer these smaller loans with:
- Less documentation than a typical financial institution
- More flexible underwriting criteria
- A slightly higher interest rate
When a FinTech loan is the only option to bridge a gap in cash flow, where do you think they go?
Your financial institution can do more to make capital more accessible and affordable for small businesses. And you don’t even need to be a CDFI!
How can your loan products better assist small businesses? Forgiving the corporate buzzword, is there an outside-the-box solution unique to your market?
Payment Processing
Cash flow is king for small businesses. Payments mean funding for the next day’s operations. When they get paid, they want access to it. Show me the money!
However, many small businesses are still behind the times. In the 2019 AFP Electronic Payments Survey, 42% of all B2B companies reported still using paper checks. That number is a record low. Check use has fallen nearly 50% since 2004.
And there’s interest in using new solutions. The survey also found more than a third of businesses “are looking to stay current with new developments and potentially aim for an early adoption to reap early benefits.”
Those who embrace electronic payments will gain advantage in access to funds and convenience.
Online Payment Networks
When you think about paying online, PayPal obviously comes to mind. Don’t forget the other giant, Amazon, as any merchant can also adopt their service to accept payments. In some ways, they both offer financial institution-like services for their clients (lending included!).
Today, there are a wide range of companies offering B2B payment services for your business needs. They can empower features from P2P payments (replacing the traditional cash exchange) to business purchasing (replacing the paper check), and more.
Some payment systems let businesses accept transactions from POS machines. These provides guarantee next-day availability of funds. Say hello to your money!
Think about your business clients. Given the choice, would they wait days for their money if they can get it tomorrow instead?
“If only it were that easy, Joe!” you exclaim. I understand. For most community banks and credit unions, providing direct payment processing is too costly. However, your institution could partner with some of the payment processors capable of next-day service.
Payment processing has more competition than ever before. Your account holders have options that are cheaper, more feature-filled, and faster than what you are used to providing. And moving their business is simple. Good thing you can do something about it!
Now that your business accounts can move money around more efficiently, they need a place to hold it all! That brings us to innovations in business checking you can implement today.
Business Checking
Checking accounts are the cornerstone of the business-to-banker relationship. Besides the digital shift for access and management, business checking accounts today are similar to those from decades ago. Would you say your business checking account has these similar features?
- Minimum Balance Requirement: Typically $100 to several thousand dollars to avoid a monthly service charge.
- Limited Free Transactions: Most checking accounts begin charging per transaction after the business exceeds a certain limit in a month.
- Fees: If the business exceeds the previous number of free transactions, they incur a fee on a per-transaction basis.
Specialty services such as wire transfers also incur added charges.
Would this account meet your expectations? Imagine your business clients.
Small business owners want more. They want easy-to-use services that simply integrate into their workflow. While not worrying about getting nickel-and-dimed on a range of fees. Predictability of costs and benefits is important for their budgeting.
And what if those business checking relationships could create value (and revenue) for your credit union?
Virtual Bank Competition
Since traditional banks weren’t meeting small business owner needs, others emerged to fill the niche. Today, we call them Virtual Banks. These online-only and sometimes “non-bank” companies offer business as well as personal accounts. Online-only banks and “non-banks” are beginning to offer business as well as personal accounts.
One such company you may have heard of is Novo. They are an “over-the-top” banking solution (supported by Middlesex Federal Savings) focused on entrepreneurs and small businesses.
Plus, they’re FDIC insured! How? Great question. Because underneath, they’re the “bank” of Middlesex Federal Savings. Thus, you get the assurance of a big bank with the nimble features of a fintech. (Plus, there’s the perk that if they do go under, your money is safe.)
Speaking of, another fintech which didn’t survive, Azlo, conducted their own research to determine the most desirable features for a business account. Here’s what they discovered:
- Payment processing
- Bill pay
- Mobile check deposit
- Digital invoicing
It’s not a surprising list. Guess they weren’t able to deliver. But isn’t it what you would want?
Novo also integrates with Stripe for both eCommerce and point-of-sale transactions. Combined with a digital-first account focusing on speed and simplicity, they help give business owners fast access to their funds, an essential feature for growing companies.
They’re not the only company creating a better experience for your business account holders. Others offer similar platforms. Take a look at your business checking. If you were an entrepreneur, which would you choose?
Not to despair! Your institution can be there for underserved entrepreneurs and small businesses. While growing your business checking/lending. And it may start with the platform discussed below.
Reader note: We have no interest or business relationship with Novo.
Making Business Sense
Value-Added Business Checking is one way to provide for underserved small businesses. Naturally, it may not fit your financial institution’s model, or it might. The concept delivers products and services small business owners want.
It potentially can help you address small business challenges, including:
- Helping access credit through online lenders…even if you can’t provide the loan (yes, you still receive income)
- Providing cyber-security tools for small businesses
- Sharing a range of benefits which can play a role in employee loyalty
This comes alongside generating a substantial flow of non-interest (fee) income. Today, most institutions charge business owners for services they need. And it’s a big part of why these new online options exist. Instead, why not offer a service business owners want?
People, business owners included, will pay for services that offer them value. If the new baseline is the Azlo-style “free everything”, you will need to do more. And serving those traditionally passed over by most banks goes a long way towards fulfilling your mission of financial empowerment!
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Dedicated to helping your credit union, large or small, deliver mission-focused financial empowerment to your members. And make a positive impact on your community while you’re at it.
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