A brief history of SME business banking in the U.S.
Choose the right bank for your business
In most countries, SMEs are very important for the well-being of the economy. They are seen as the most important aspect for job creation and GDP growth. The private sector depends on SMEs for social stability and diversification towards the market (IFC, 2012). However, in comparison to large corporations, SMEs don’t have the same access to market and capital, mainly due to their size.
Trying to be everything for everyone
For many years, banks in the U.S. tried to be everything to everyone, especially for small and medium sized enterprises (SMEs). Lending and spending was
high for a pretty long time prior to the financial crisis as economic growth was strong. After the crash, profitability was down and credit losses skyrocketed, urging new regulations and a more restrictive policy. As a result, several large U.S. banks are now more careful when it comes to granting loans to SMEs. As it so happens,
lack of consistent financing is listed as the main barrier of growth by SMEs. Without access to financing, it’s challenging to invest in increased productivity.
An industry in transition
However, by educating the banks in the untapped opportunities that SMEs hold, the trend is slowly, by surely, changing. SME banking is definitely an
industry in transition, where more and more banks are developing SME branches and specific strategies for the industry. The realization among the banks is that SME banking is much more than just lending money, it’s being involved in the value-creating process. These tailored approaches are helping banks to overcome the myth that all SMEs are a high-risk business.
Banks need to step it up
A big development that banks need to invest in, are their online offerings. Newer, faster-moving banks are all about easily-accessed and efficient banking services. In order to compete for SME business, big banks need to improve their online activities. Through multichannel offerings, SMEs will be able to access the same services as when walking into a physical branch, making the transactions more efficient for both parties. Furthermore, as online retail is vastly developed, smaller businesses need to be able to offer the same services, like online ordering and payment processing, as their larger competitors.
Research shows that smaller banks are more likely to issue loans to local businesses, compared to large institutions. A big reason seems to be that large banks rely on computer models and credit scores alone to determine whether or not to give out a loan. Smaller banks tend to understand the local market better, invest the time into learning about the business and to build a relationship with the business owner. Their risk calculations are therefore usually more nuanced than the computer-generated ones.
Choosing the right bank
As a SME, you should be on the lookout for a supportive and reliable bank, which you can build a long-term relationship with. Know what you want from your bank – both now and in the future. Is it sufficient with a checking account? Or are you looking for investment advice? Credit-card processing? Look over your needs and try to rank them in order of importance. From there, compare both big and small banks.
Wall Street Journal argues that smaller banks may have more knowledge of the market you are operating in, but you may find better interest rates in a larger bank. Read up on which fees are associated with different accounts and services. It is easy to get caught off guard when you’re uncertain of your needs. Test their customer service before signing up – are you satisfied with their response time?
Reflect upon location
Will you be travelling a lot and needing access to national ATMs? Do you make weekly deposits? Or is it more important that your bank has a well-developed online platform? If you think you’ll be visiting the bank at least on a monthly basis, consider the bank’s location in regards to your office or your home.
As a SME, you will have a lot of contact with your bank. So, ultimately, you’re building a long-term relationship that mainly has to be founded on trust. A bank can prove to be a knowledgeable partner when planning for the future, and could also assure clients of your stability. Furthermore, a reliable bank contact can help you forecast your financial needs, as well as advice you in your business strategies.