Summary:
Banks heavily rely on traditional means to assess loan risk, often neglecting other useful metrics for assessing a business's health
Personalised banking: Bank managers who know their clients and the intricacies of the business are now a rarity
There are significant opportunities for banks to champion small businesses, the end result strengthening the economy as a whole.
Understanding the nuances of businesses is key to cultivating a deeper relationship between banks and business owners
In my recent engagement as a guest presenter with a group of New Zealand and Australian bank risk assessors, it became apparent that there is a significant gap in understanding between banks and small businesses.
While banks excel at evaluating historical financial data, they often miss the nuances that indicate a small business's potential for growth and sustainability. To bridge this gap, banks must adopt a more forward-looking approach and cultivate deeper relationships with small business owners.
What do banks miss when understanding NZ businesses?
Historical Data vs Future Potential
Traditionally, banks have relied heavily on recent historical information — balance sheets, profit and loss statements, and past cash flow—to assess loan risk. While these metrics are important, they do not paint the full picture of a small business's health or future prospects. Small businesses often experience fluctuations and transformations that historical data cannot fully capture.
To better support small businesses, banks should also consider:
Work Ahead in Dollars: Evaluating the pipeline of upcoming projects or contracts can provide insights into future revenue streams.
Improvements in Ratios: Positive trends in financial ratios, even if current numbers are not stellar, indicate improving financial health.
Outside Expertise: The involvement of experienced advisors can significantly enhance a business's strategic direction and operational efficiency.
Strategic Direction: A clear and viable strategic plan can showcase the business's potential for growth and long-term success.
By integrating these forward-looking indicators into their risk assessment models, banks can make more informed lending decisions that support the growth of small businesses.
The Decline of Individual Relationships
In the past, banking relationships were deeply personal. Bank managers knew their clients and understood the intricacies of their businesses. However, the rise of corporate banking practices has shifted the focus away from individual relationships to standardised processes. While this shift has streamlined operations, it has also created a disconnect between banks and the small business community.
To better serve small businesses, bank representatives need to rebuild strong, individual relationships. This involves:
Regular Engagement: Frequent interactions with business owners to understand their challenges, opportunities, and plans.
Tailored Advice: Providing customised financial solutions and advice based on the unique needs of each business.
Proactive Support: Offering resources and support before issues arise, helping businesses navigate challenges and seize opportunities.
Bank Policy Headroom: Policy headroom to provide small business bankers the flexibility to asses risk within a bank approved framework and be bankers!
Championing Small Business: A Strategic Opportunity
For individual bank brands, there is a significant opportunity to champion small businesses by implementing strategies that foster a deeper understanding of the SME community. Banks that genuinely invest in understanding and supporting small businesses can differentiate themselves in a competitive market. Key strategies include:
Dedicated Small Business Teams
Establishing teams focused solely on the needs of small businesses.
Educational Programs
Offering workshops and resources to help small business owners improve financial literacy and business acumen.
Technology Integration
Utilising advanced analytics and technology to provide personalised financial solutions and insights.
Community Involvement
Actively participating in local business communities to build trust and rapport.
By championing small businesses, banks can not only enhance their own growth but also contribute to the broader economic stability and prosperity.
Conclusion
The relationship between banks and small businesses is at a crossroads: To better understand and support small businesses, banks must move beyond historical data and embrace a more holistic, forward-looking approach.
By rebuilding individual relationships and adopting strategies tailored to the unique needs of small businesses, banks can become true partners in their clients' success.
This not only benefits the businesses themselves but also strengthens the economy as a whole. Now is the time for NZ banks to seize this opportunity and become champions of small business growth and innovation.
