Community banks use relationship banking to maintain their disproportionate share of small business loans, according to the 2024 FDIC small business lending survey.
Ninety percent of small banks allow small business loan applicants to state their case for approval by meeting with decision-makers during the application process, according to the Oct. 2 report. Fewer than one-quarter of banks with more than $50 billion in assets do the same.
Sixty-three percent of small banks report having more loan flexibility than their competitors, compared with only 23 percent of large banks. Small banks also hold a disproportionate share of loans under $1 million, according to the FDIC.
“These findings help us understand why community banks appear to punch well above their weight in the small business lending space,” said FDIC Chair Martin Gruenberg. “While nearly all banks prioritize relationships with their small business borrowers, not all banks are relationship lenders. Community banks are the ones that take the extra step to leverage those business relationships as part of the process of underwriting small business loans.”
The survey was conducted in 2022 and included responses from 1,300 banks. Small business customers were often near physical bank branches, according to the report. For the 80 percent of banks that defined their small business lending market as being where their branches were, borrowers were often within 40 miles.
Banks often use remote communication — emails, file transfers and video conferencing — to supplement rather than replace in-person communication, according to the FDIC. Few banks allow borrowers to complete small business loan applications online.
Although one-third of banks allow prospective borrowers to finish a portion of small business loan applications online, the vast majority still don’t allow applicants to entirely complete the process virtually.
“While most banks are adopting new technologies, these innovations have not replaced the relationship-oriented and staff-intensive nature of small business lending that continues to be focused around local branch office locations,” according to the FDIC.
The report was released as competition continued to grow between banks, credit unions and fintechs. According to the survey, small banks are more likely to regularly compete with credit unions, while their larger peers more often compete with fintech lenders, credit card issuers and other financing companies.