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Top Three Trends from Raddon’s Annual Small Business Study

April 4, 2018
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Small business optimism has remained elevated in 2018 as business owners look to capitalize on improved economic and market conditions. This optimism is welcome news for financial institutions that are in a position to assist these businesses in meeting their growth goals.

In Raddon’s recent study, Small Business Insights: Technology Fueling Growth, we find that two out of three small business owners expect their sales to increase for the current fiscal year relative to the prior year.

That’s just one of the findings from this year’s study. Every year, Raddon performs a “state of the industry” insights study on the small business market, exploring habits, expectations, and behaviors of American small businesses. Here are three trends we’ve noticed that may impact your plans for 2018:

1. Alternative lenders are increasing competition and changing expectations.

In anticipating growth, many small business owners will seek additional capital to help fuel their expansion. Collectively, nearly one-half (48%) of all small businesses anticipate some sort of additional financing - whether it’s seeking a new loan, or adding balances to an existing loan or line of credit. From a trend perspective, this 48 percent represents the highest loan anticipation rate since the end of the recession in 2009.

In recent years, more small businesses have turned to non-traditional online lenders to help fulfill this loan demand. Online entities that promise a fast and efficient loan approval and funding process have now been used by 24 percent of small businesses, which is a rapid increase from the 14 percent use of such lenders just three years ago.

Raddon’s Small Business study highlights that the average business borrower anticipates borrowing approximately $75,000, with 65 percent of prospective borrowers needing less than $50,000. Given the relatively modest loan amounts, at least by commercial loan standards, financial institutions should address current loan processes for smaller dollar business loans. Is the process as efficient as it can be – for both the financial institution and the business customer?

2. Satisfaction and Net Promoter Scores are lower for small business customers than their retail counterparts.

Just over one-half (51.9%) of small businesses are very satisfied with their primary financial institution. Net promoter scores of this segment hover around 28, which is below the norm of 41 that Raddon’s research typically sees when surveying the general consumer population. While big banks dominate the PFI market share, with 71% of small business claiming one of the top six banks as their primary institution, community banks and credit unions tend to have higher satisfaction and loyalty scores.

But while satisfaction scores are slightly lower for major bank and regional bank business customers, they do not seem to have impacted attrition or small business’s likelihood to remain with the bank. Nearly nine out of 10 (88 percent) small businesses that use a major or regional bank as their primary institution indicate they are extremely or very likely to remain with the bank.

What does all of this mean for community-based institutions? The quick takeway is that there is an opportunity to steal market share – but it won’t necessarily come easy. Small business owners will need to be persuaded that their needs will still be met from a product, technology, and service perspective.

3. A financial institution’s technology and digital services are increasing in importance for small business owners.

Technology offerings continue to play an important role in a small business owner’s decision to use one financial institution over another. When selecting a financial institution, 57 percent of small businesses are impacted or strongly impacted by an institution’s technology resources. The influence of technology increases as the size of the firm increases, with nearly two-thirds of firms with at least $500,000 in annual sales reporting that technology offerings play a significant role in their decision to use an institution.

Major bank business customers are the most likely to cite the influence of technology in their decision to use the bank, with 30 percent of small businesses using a major bank indicating the bank’s technology resources had a strong impact on their decision to use the bank. Correspondingly, major bank small business customers are also more likely to describe their firms as early tech adopters, frequently looking for the latest technology for their business as soon it is available. Customers of regional banks, community banks, and credit unions are less likely to be early tech adopters and more likely to take a wait-and-see approach when it comes to new technology.

Mobile banking has also had an impact on retention and satisfaction, with 50 percent of mobile banking small businesses reporting that their satisfaction level with their institution increased after they started using mobile banking.

Bottom line - increasing small business market share goes beyond competing on price alone. Financial institutions should focus on promoting technology tools alongside product offerings, communicating how these tools can help solve for challenges the small business faces.

Overall, this year’s small business insights study paints a clear picture that 2018 should be a year of opportunity for financial institutions to grow their small business portfolio. Building trust and targeting businesses with relevant offers during their points of need will be key to strengthening market share.