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Portfolio of Lending Products for SMBs
Question: Why should a bank develop its portfolio of lending products and financing services for small and mid-size businesses (SMBs)?
Answer: Changes in the credit markets will alter the structure of the regulatory landscape and product marketing scope of the banking industry. For banks to remain relevant in the changing world of banking they must develop products that specifically address unique financing and credit requirements of the diverse needs of the large SMB market.
A bank that recognizes that the SMB market is not homogeneous and is comprised of many micro-markets of varying degrees of development, scope and size is at a good starting point to consider how financial products can be engineered and positioned. Financing requirements of a start-up are different from those of a family business looking to explore an exit or transition strategy; credit facilities needed to attain the differing business objectives need to be developed.
Bankers need to consider at a product marketing level the different types of financing requirements that a franchise, distributor, manufacturer, restaurant or professional corporation may require. The rise of Islamic financing and the development of socially responsible and eco-friendly finance products are good examples of how financial products are responding to unique market-driven demands. Every type of business has its own risk, cash flow and capital requirement profile. Terms, structures, covenants, collateral requirements and rate scales are unique to each business type and the development of credit product portfolios that recognize and address these differences will help banks to compete and grow in the SMB market.
When you consider the enormous fee, collateral sales and interest income that MSBs, payday lenders, merchant finance companies and other factor service agents command, you can’t help but think that many banks failed to respond to an enormous opportunity in the consumer finance market. Banks need to find a way to develop finance and credit products to stop erosive factors in potential revenue streams and to establish relationships with today’s micro businesses that can grow into tomorrow’s hugely profitable business relationships.
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First published on BankersOnline.com 5/05/08
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