Small and mid-sized business (SMB) owners reveal an overwhelming desire for banks to offer options when a loan application is denied. The Spring 2011 edition of the Capital Access Network (CAN) Small Business Barometer reveals that 78 percent of SMBs would consider an alternative working capital option if offered by their bank and 71 percent stated that their opinion of the bank would improve as a result. SMBs want to work with their bank; 43 percent say the bank is one of the most desirable sources for working capital but only 34 percent of businesses turn to the bank first.

This gap may be explained by the fact that nearly one out of four SMB responders admit to being rejected by their bank for a loan, credit card or other financial service, and 77 percent of those rejected were not offered an alternative. Another 15 percent have never even turned to the bank for capital – perhaps because many of them believe they will be rejected. When banks do not offer additional options, deposit, checking, retirement and investment accounts are jeopardized as the business owner seeks capital elsewhere. The ability of a bank to meet working capital needs is a key driver of business customer satisfaction.

Cutting Edge Options

While banks want to increase their lending to SMBs, the tools they have traditionally used, such as owner credit bureau scores and tax return generated ratio tests, have not proven to be successful risk indicators. Some banks are moving towards new technologies and risk scoring and risk management models that could enable them to say “yes” more often to SMB borrowers while providing more capital to those they approve. Recent bank use of “Daily Remittance” lending models (as opposed to traditional monthly payment or remittance modes) is an example of this new toolkit.

Daily remittance helps finance providers approve capital requests with less risk by looking beyond traditional bank underwriting criteria - like personal credit scores of the owner, personal collateral and liquidity - and focusing on recurring revenue information like card sales or bank deposits to help assess future business viability. SMBs benefit from increased likelihood of approval, plus cash-flow friendly payment and remittance in the form of small “daily” versus monthly payment amounts that align with a business’ "daily" sales. Daily remittance-based products are now offered in multiple forms including loan products (like those offered by NewLogic Business Loans, Inc.) as well as Merchant Cash Advances (selling future card sales at a discount in return for capital today). While 32 percent of business owners stated they are aware of these types of offering, 41 percent stated they are likely to choose a product with a daily remittance feature.

Meanwhile, banks that are not ready to adopt next-generation scoring and servicing paradigms are looking to refer loan declines to third party finance providers who provide capital to the bank’s customer while enabling the bank to maintain the other profitable SMB service relationships.

“Banks must innovate or lose market share, core accounts, cross-sell opportunity and revenue to innovative finance providers serving the SMB market. Traditional financial institutions need a dynamic portfolio of financial products that serves the majority, not the minority, of small businesses,” says Glenn Goldman, CEO of CAN. “Daily remittance products could help them serve clients whose requests for capital have been declined, and potentially the rest of the bank’s customer portfolio. If this type of capability is available, there is little reason why they should not use it.”