Just two years ago, banks and credit unions weren’t really lending to Main Street. They were targeting larger companies that needed cash injections over $1 million, good credit, lots of collateral, impeccable cash flow… need a loan. Why? Because not much (any?) technology was used in the process, meaning it cost the same to process a $1 million loan as a $10,000 loan, so banks just took out bigger loans and trusted on business relationships.
Then the pandemic hit. And changed everything. While lockdowns and mandates dealt a heavy blow to the 70 percent of small businesses forced to close, the blow came when lenders…any lender– turned off the tap of cash, effectively freezing Main Street.
When the Paycheck Protection Program started, the closed banks had to find a way to accept PPP applications online. For the most part, fintechs, including Lendio, became the bridge for lenders’ technology gap. Banks had a pretty steep technology learning curve, but the experience forced them to take a serious look at APIs, workflows and digitization. They loved what they saw and many of them do not return.
This includes Texas National Bank (TNB), one of more than 300 traditional banks that Lendio has helped during the pandemic. TNB’s president, Joe Quiroga, was kind enough to sit down with me to talk about the PPP experience, and how it’s changing the way his bank approaches small business lending in the future.
BROCK: The pandemic – you said it helped you see a better approach to systems and processes your bank used before the pandemic. Can you explain?
JOE: We had a day where we had to book 300 loans on our system – we had never had to book 300 loans in a month prior to the pandemic, much less in one day – and I saw this escalate. I knew we might be able to manually book 300 loans today, but tomorrow if we had 500 or 1,000 we wouldn’t be able to do that by manually typing all of this into our system.
BROCK: So you made changes?
JOE: Yes. That’s when the importance of automating, integrating and sharing data hits us. Eventually we got to the point where we automatically booked 1,000 loans per day. It just happened. We didn’t have a human to physically type these loans into our core system. We knew it was a better way to do things now and for the future.
BROCK: How long would this evolution have taken without the pandemic?
JOE: We’re a smaller institution. We are dynamic and we are younger, so we goods that path has already been taken, but I think what forced the pandemic… it accelerated a 5 year project in a 1 year turnaround.
BROCK: What impact will these changes have on your bank?
JOE: If you compare us to the traditional bank in Texas or even in our area, we processed 5 to 10 times as many PPP loan applications relative to our size. It really paid off for us and we will now leverage that strategy for small business loans. I’ve called “small business lending” the last frontier of community banking – these are the only types of loans we hold onto.
It works to have a partnership because we have something that fintechs don’t have… we have capital and fintechs have the right process and the right technology. That’s how this marriage comes together to say, “Hey, we can coexist.” Frankly, we can now fund loan transactions that we didn’t even see in our backyard before. That is the real evolution for a community banker.
A new kind of borrower
What Joe failed to mention, however, was how much the market needs this evolution. More than 4.4 million new companies were established in 2020 (source: US Census Bureau). Last year, that rose to 5.4 million. Compare that to 3.5 million started in 2019 on the eve of the pandemic. Besides, 52 percent of these new businesses started with less than 10,000 in funding, and nearly half of that group had less than $5,000 when they opened their doors.
The majority of these new businesses depend on existing money, savings and family/friends to start with capital. But some are also realizing that there are new loan options available that simply weren’t there before the pandemic.
We are seeing an increase in the number of lenders embracing the gig economy and taking out loans that cross the fence between a personal loan and a sole proprietorship loan. And, as Joe said, banks didn’t really “see” these super small businesses in the past. While you can’t say much good about a global pandemic, PPP lending has fueled this evolution as so many of the people receiving PPP loans were in fact sole proprietorships. And for those who got into business during the pandemic, there’s never been a better time to access capital. Optimism on Main Street is strong and growing.
How lending is improving for the small business too
We worked with thousands of entrepreneurs on PPP loans. For many, it was the first time applying for a loan outside of a traditional bank or credit union. For some, it was their first attempt at applying for a business loan.
Regardless of whether they were successful in bringing in money, a lot of the feedback we received from the applicants was about how easily and how quickly we were able to process their paperwork. The PPP process clearly had its drawbacks, but it also introduced small business owners into a world of lending that they either knew nothing about or may have never felt comfortable with before.
Today, we have more confident entrepreneurs and a better understanding of how to access capital. They are leveraging their access to cash in ways never seen before in our industry. While uncertainties exist, including high inflation, supply chain delays and the global effects of the war in Ukraine, small businesses have a renewed focus and are better equipped to tackle whatever lies ahead.
We still have a long way to go to get back to where we were before the pandemic, but there’s no question that Main Street and the financial institutions supporting the pandemic are both more efficient and resilient than ever before.
