How Big Banks Can Reclaim The SME Financing Lead

All eyes are on alternative lending as the market grabs headlines with massive IPOs and high-tech solutions to cash flow management. Industry players are seen as the alternative to big banks, which turned many small business loan applicants away or hit them with high interest rates in the wake of the 2008 financial crisis.

But as the economic recovery progresses in the U.S., banks have often maintained their edge over alternative lenders for SME financing. That’s not to say that banks can get comfortable in the winner’s circle. New research from Palo Alto Software reveals that small- and medium-sized enterprises are hungry for financing and other support from their primary banks, meaning that traditional financial institutions have an opportunity to not only close the gap for SME financing needs, but gain a stronger lead over alternative lenders.

The SME Financing Gap

According to Palo Alto’s paper “Planning And Management Technology Can Increase The Lifetime Value of Your Customers,” with research done in conjunction with Barlow Research Associates, 60 percent of small businesses surveyed said that monthly cash flow is a concern. Fewer than half (41 percent), however, said that their primary banks fulfill their financing needs.

The data offer a clear picture as to why some small businesses may turn to alternative financers to gain the capital unfulfilled by their banks. But, according to Palo Alto and BRA, the findings also reveal an opportunity for mainstream banks to step up their game when it comes to small business clients.

For example, 25 percent of bank account officers surveyed revealed a sentiment of disconnect from their business customers, and agreed that they could better serve SMEs if those businesses offered advanced notice of their impending cash flow issues. Further, 63 percent of business owners said that, if available, they would take advantage of cash flow management tools and software.

Strike While The Iron Is Hot

According to BRA president and owner John Barlow, it is clear that banks should jump at this business opportunity as they explore new ways to boost revenue, other than offering automated bookkeeping and automatic bill payment solutions.

“Decreasing fee income has become a major pain point for financial institutions, but they haven’t addressed the most promising ways to bring in additional revenue,” he said. Those ways, the paper highlights, include providing small businesses with cash flow management tools that can forecast and plan SME financing for the next 12 months.

Banks should also explore ways to aid business owners with data intake and analysis, integrate cloud-based financing software, and maintain a consistent dialogue so SMEs know when they are eligible for new, emerging credit products, the researchers suggested. “Small businesses are the core of our economy, and their success should be a priority,” Barlow said. “Our data reinforces the need for a bank to provide tools to help their small business customers better plan and manage their growth.”

Banks are already ahead in the race to secure more of the small business financing market, but it’s tight. Working with B2B SaaS developers, however, could both fulfill SMEs’ needs for better financing tools and lengthen mainstream banks’ lead ahead of the alt-finance competition.

Palo Alto, which owns B2B SaaS tool LivePlan, agreed that its tool should be utilized by banks to gain a competitive edge over alternative financers. But it’s a sentiment that can be applied to a flurry of B2B software innovation seen today. “LivePlan is mutually beneficial for SMBs and banks because the tool helps build relationships,” said Palo Alto CEO Sabrina Parsons. “The platform serves as a common ground through which financial institutions can demonstrate their dedication to a businesses’ goals, which will increase customer engagement and retention.”

Small businesses need working capital and want useful software. By strengthening their communication with SME clients and working with B2B SaaS developers, big banks may be able to cement their top spot in the small business finance sector.