Time for Small Business Lenders to Think Short Term

Taking a long-term approach to financial decision making makes the most sense when the economy is working on all cylinders. ROI comes from betting on potential profits and future development from long-game savings to long-term loans.

Yet long-term financial investments pose a higher risk that the majority of the nation can not afford right now let alone small businesses or community banks, in an uncertain economy, like the one we are witnessing right now.

It is difficult to foresee whether an organization would have the staying power to still survive in five years in times of great recession, rendering long-term investments less appealing.

Small Businesses Think Short-Term By Default, Shouldn’t You?

We also know that low Federal Reserve rates are not going to change much with near-zero interest rates likely to continue until 2023, according to the Federal Reserve.

Banks will have a tougher time making money on loans in this situation, but profitability is still feasible. It just needs a transition from long-term thought to short-term thinking.

Focusing on short-term loans helps banks to do far more than just weed out long-term applications, opening up a whole group of clients who by default fall into this category: applicants for small businesses.

Think of the loan needed to repair a piece of costly equipment or to buy seasonal inventory for a small company. A large proportion of the capital needs of small companies are short-term by default.

Lenders can produce more leads, faster returns, and more business in less time by taking advantage of the increase of small businesses seeking capital and catering to their immediate needs, speeding approvals without incurring additional risk.

Here are a few reasons for capitalizing on short-term opportunities for small business loans and how it can help both you and your small business clients in the process.

Time for Small Business Lenders to Think Short Term

Short-term means lower risk

A short-term lens is a way to go when the future is unpredictable. Instead of concentrating on lagging credit-worthiness metrics, such as last year’s tax returns, analyzing what’s going on in the organization right now is even more efficient.

The best way to minimize exposure and mitigate risk is to base lending decisions on real-time cash flow and adhere to short-term agreements. And small business clients can be perfect targets when it comes to handling smaller amounts of credit over shorter periods of time.

Small companies tend to need smaller loans, even in stable market environments and usually use them to meet urgent, short-term business needs.

Lenders should not settle for short-term small business clients by sticking to the short-term, but adapt lending processes to best suit the business models of small business clients, a mutually beneficial incentive.

Short-term means higher margins

Small business loans in the short-term can also yield higher margins. With short-term loans to meet immediate small business needs, lenders may potentially charge more, which in turn provides more protection and higher margins in the same contract, something unusual in higher interest circumstances.

And the need for urgent capital is real, with 34 percent of small business owners reporting that their current cash on hand will last just a month or less.

Lenders will make more money upfront than they can for longer-term loans by appealing to the short-term requirements of these companies, bringing the immediate cash flow required to survive to both the bank and small business clients.

Instead of financing a five-year long-term loan, short-term lending helps banks to lengthen capital and limit exposure to only a few months. This does not only indicate that small companies get loans quicker, it implies that lenders are paid back faster, leaving less time for more profitability.

With higher returns, it is possible to expand more loans faster and increase the number of loans without incurring unnecessary risk.

In the short term, higher revenue means higher

In opening up, new revenue streams, automating the process of small business lending may also play a part. For instance, loan officers may come to the same conclusion in less time and at a lower cost by eliminating manual processes and allowing auto-rejections or approvals based on your credit policy.

The cost of processing short-term small business loans is proportional to the benefit they create by taking out such manual processes, which may result in a new stream of revenue in the process.

As volatility tends to cloud the economy, it can be instrumental in building favorable economies and counteracting today’s low-interest rates by implementing a short-term small business lending strategy.

To alleviate the effects of the current recession and help plan more soundly for the future, lowering the bar for small business lending would help offer reduced risk, higher margins, and faster returns.