If you are selling a product or service with any significant price tag the issue of financing will come up. The more flexible you can be in offering financing the more likely you will land the business. Many SMBs do not fit the standard funding criteria that most companies and banks look for. Many do not have a multi-year track record of sustained profitability because they are investing the money back into their company to fuel growth. The owners often do not have significant personal equity built up either because they have pumped their assets into their businesses.
This is where relationship lending comes in. While the SMB clients may not fit the ideal company to lend money to, they can still be highly profitable. Relationship lending involves working with the business customers who do not meet the typical profile. It requires moving beyond the statistical models and creating a vendor-client relationship. It means getting more detailed information about your clients and monitoring them as they continue on their path. It is a lot more work to manage and usually results in higher fees and interest rates.
But it can pay off. According to a new report by Dr. Joe Peek with funding from the Office of Advocacy, relationship lending has proven to be a profitable niche for many small banks who use it as a competitive advantage over their larger counterparts.
"small business lending is a profitable market niche for small publicly traded banking organizations... The evidence is consistent with these banks having a comparative advantage in originating and monitoring small business loans compared to larger banking organizations."It was also found that the banks who engaged in relationship lending had an increased market valuation over those who did not.
SMBs are looking for organizations who understand their needs and are willing to work with them. If your company has not already looked at financing and relationship selling, the time could be ripe for you to make a strong footprint in the SMB community.