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SMBs and PPP and PFI: Building Loyalty and Helping Small Businesses Survive

January 28, 2021
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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:

  • “It has been a lifesaver for our company”
  • “Helped keep my business alive”
  • “PPP was a blessing to keep the business going for April to June 2020 quarter"
  • “PPP is something that gives our small business a fighting chance at survival”
  • “It was a bit challenging as it was new to everybody, but we were so grateful when the application went through and the money hit our account”

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.

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Type of Financial Institution Used for PPP Loans

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.

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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.

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Second Round of PPP Represents an Opportunity to Strengthen Market Share

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.

  • “I think the application process needs to be improved to make it easier for small businesses to apply”
  • “It took way too long for the bank to process the application”
  • “It is a shame that your own banking institution creates such hoops that you are unable to take advantage yet provides to companies who are in far better financial shape”
  • “Our regular bank turned us down. We had to shop for weeks to find a bank that would approve the loan”
  • “It was a very chaotic process with limited guidance in our area”
  • “The criteria for qualifications were confusing and changed in mid-stream. It seemed the government kept changing its mind about whether or not we qualified for the loan”
  • “Wish the process was simpler, less arbitrary, banks more cooperative, and approvals expeditious – and money sent to businesses far quicker than they were”
  • “Waiting is frustrating, no communication about what's going on with our application”
  • “Difficult application, possibly difficult forgiveness, no end in sight. Attractive package but to take advantage have to go through many bureaucracies and layers that may not be worth the time and effort”
  • “My bank made it incredibly difficult to apply and will not even answer phone calls about this matter or give you a dedicated loan officer”

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).

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Make It Easy

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:

  • How do you make processes and transactions easier?
  • How do you better educate your business clients on the PPP process?
  • How do you improve your communication with small businesses?
  • For community-based institutions, how do you improve the awareness within your accountholder base that you have the products, services, technology and expertise to assist small businesses?

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.