January 28, 2021 | Marcus Rothaar
With the passage of December’s $900 billion coronavirus stimulus package, the Paycheck Protection Program resumed on January 11, giving financial institutions another opportunity to facilitate much needed assistance for struggling small businesses. While small businesses have shown signs they are becoming more optimistic that business conditions will improve in 2021, challenges still exist in many sectors. In the recent Raddon survey of 1,200 small businesses with up to $10 million in annual sales, 49 percent were seeing modest signs of economic recovery in their communities but expected it to take quite a while to fully recover.
For many, Paycheck Protection Program (PPP) loans represent a bridge to this recovery. As a small business owner told us following the first round, “The PPP saved our company. If we hadn’t received this funding, we would be closed. Period. It was a lifeline.” This type of statement was repeated frequently by small business owners in the Raddon survey:
Overall, 32 percent of small businesses received a PPP loan in that first round, representing more than $500 billion in funding between April and August 2020.
Three in four small businesses applying for PPP loans in 2020 relied on their primary financial institutions to facilitate the process. Another 14 percent used a secondary (nonprimary) institution the business also uses, with 10 percent reaching out to a new institution the business had not previously used. With 64 percent of small businesses using one of six major banks (Bank of America, JPMorgan Chase, Wells Fargo, PNC Bank, U.S. Bank and Truist) as their primary financial institution, it’s plain to see why major banks have seen more favorable ratings from their small business customers during the pandemic compared to their community bank and credit union counterparts.
As shown in the chart below, small businesses using a major bank are significantly more likely to report their opinion of the bank has changed for the better, compared to businesses using regional banks, community banks or credit unions.
Similarly, small businesses using a major bank were more likely to recall an offer of assistance from their financial institution (32 percent among major bank customers versus 15 percent at other institutions), recall having their PFI reach out at all (54 percent for major banks versus 45 percent at other), and report an improvement in customer service during the pandemic (26 percent among major bank businesses versus 11 percent at other).
These trends indicate that some financial institutions have been more effective in deepening business client relationships and building loyalty than others during the pandemic. While some of this uplift may be attributed to facilitating more PPP loans, the chart below shows the perception has been influenced by a variety of factors, including beliefs around safety, technology and communications.
Events of 2020 have given small businesses a reason to reevaluate their financial institution relationships. In some cases, bonds have become stronger. But in other cases, it has opened the door for a competitor to win the business. Of the 10 percent of small businesses that used a new financial institution to fulfill their 2020 PPP loan, 45 percent have already used or anticipate using this financial institution again for future banking need (18 percent have already opened another deposit or loan account at the new institution, and 27 percent are likely to do so in the future).
The next round of PPP loans provides another opportunity for financial institutions to strengthen relationships with existing business clients and improve market share by winning business from competitors. The opportunity is large, with 44 percent of small businesses likely to pursue funding in the second round.
While the 2020 PPP loans were cited as a lifeline by many small businesses, the process was not without confusion or complaints. If the frustrations expressed by small businesses shown below are any indication, there is a clear opportunity for financial institutions to help businesses navigate the entire process – from the application step to the loan forgiveness process.
When rating the PPP process, more than one in five (22 percent) small businesses assigned a ranking toward the extremely difficult end of the scale (0 to 4 rating on 11-point scale). Small businesses using a major bank as their PFI were more likely to rate the process easier (56 percent with 7 to 10 rating among major bank customers, compared to 44 percent at nonmajor bank businesses).
One small business owner in the Raddon survey summed up the PPP process succinctly by saying, “The process should be made easy; it is really hard.” While the comment was directed at the PPP process, it’s also relevant for any number of processes and experiences business clients have with financial institutions. Financial institutions looking to improve their own favorability ratings and strengthen relationships with small businesses should seek to address these concerns:
The research highlighted shows that banks and credit unions that demonstrate progress in these areas have a better chance of building loyalty with small businesses, positioning their organization for post-pandemic growth.
Your inquiry has been successfully submitted and is now being routed to the appropriate member of our team.