Small businesses are the backbone of the economy, driving innovation, job creation, and local prosperity. For banks and credit unions, increasing the volume of small business loans isn’t just about supporting economic growth, it’s a strategic move that enhances financial stability and customer relationships. Here’s why your institution should actively seek ways to expand its small business lending portfolio.
Lower Risk, Backed by the Fed
One of the most compelling reasons to increase small business loan volume is the reduced risk associated with these loans. Many small business loans, particularly those backed by the Small Business Administration (SBA), come with federal guarantees that mitigate lender risk. This means that even if a borrower defaults, your institution is protected from significant losses.
By leveraging these government-backed programs, banks and credit unions can confidently extend credit to small businesses while maintaining a healthy risk balance. This provides a win-win opportunity: start-ups and small businesses gain the funding they need to grow, while lenders can expand their loan portfolios without unnecessary risk exposure. This is especially helpful during times of economic uncertainty caused by inflation, increased supply and manufacturing costs, chain supply disruptions and other similar challenges when the number of other forms of commercial lending like construction loans may be decreasing. Small businesses serve local communities, source materials from local suppliers, and have a smaller footprint less prone to be impacted by many global economic disruptions.
Small Business Loans Drive Deposit Growth
A business that secures a loan from your institution is likely to open deposit accounts with you as well. This increases cash flow deposits, an essential component of financial institutions’ stability and lending capabilities. Higher deposit levels provide a stronger foundation for further lending and investment, ultimately increasing profitability.
For community banks and credit unions, these deposit relationships are particularly valuable. Small businesses often maintain significant balances, process frequent transactions, and utilize cash management services, all of which contribute to fee revenue and overall financial health.
Increased Customer Loyalty and Cross-Selling Opportunities
When a bank or credit union provides a small business loan, it lays the foundation for long-term customer loyalty. Business owners appreciate financial partners that support their growth, making them more likely to maintain an ongoing relationship.
This loyalty often extends beyond the business itself. Many small business owners also bring their personal banking needs to the same institution, including savings accounts, mortgages, and investment services. By building strong relationships through small business lending, banks and credit unions can create a ripple effect, increasing customer lifetime value across multiple financial products.
The Bottom Line: A Smart Growth Strategy
Expanding small business lending isn’t just good for the economy, it’s good for business. With lower risks due to federal backing, the potential for significant deposit growth, and the opportunity to foster long-term customer loyalty, banks and credit unions have every reason to actively increase their lending efforts.
By positioning your institution as a trusted financial partner for small businesses, you create a foundation for sustainable growth, stronger community ties, and enhanced profitability. If your bank or credit union isn’t maximizing its small business lending potential, now is the time to make it a priority.
Head of Business Strategies & Partnerships
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