FOR MORE INFORMATION:

                                                                                    Jim Herlihy

                                                                                    970-590-5885

                                                                                    Jim.Herlihy@Comcast.net

BANKS’ SMALL-BUSINESS LENDING PRACTICES

AT ODDS WITH GROWTH ASPIRATIONS

Low loan approval rates drive qualified prospects to competitors

            Despite continuous pressure to grow market share in a very competitive banking environment, many financial institutions are turning away a significant proportion of their potential new business prospects by not aligning their sales tactics with their credit policies.

            "According to the CEOs we have spoken to, small-business lending is one of the primary growth areas for commercial banks,” said William Phelan, president and co-founder of PayNet, Inc., the largest single data repository of current and historical lease and loan payment information on U.S. small-business owners for the commercial loan industry.

            "Some banks that we have spoken with are turning down 70 percent of small-business loan applications,” Phelan said. “The irony is that many of these qualified applicants who are being turned away end up taking their banking business, including fee generating income, to a competitor."

$177 Million in Lost Business

            A recent analysis that PayNet conducted for one lender found that over a one-year period the bank had turned away $177 million in qualified loan applications which subsequently were booked by competitors – and not a single dollar of that debt defaulted with new lenders.

            "The disconnect is between the sales managers, who are being paid to bring in new business, and the credit managers, who are being paid to minimize risk,” said Phelan. “Until their goals are aligned and credit managers are given incentives for safely growing the business, they will continue to be unnecessarily cautious on approving loans."

The Lost Loan Is the Tip of the Iceberg

            Losing the small-business loan is just the tip of the iceberg for the lender. The rejected applicant is likely to take his or her entire banking portfolio, such as deposits, bill payments, cash management and other profitable business, to the competitor that approves the loan.

            "That’s where banks are hurting themselves the most,” Phelan said. “Their tactics are not aligned with their strategy of using small-business loans to gather deposits, grow market share and cross-sell other products to the small business."

            PayNet is currently engaged in a study to quantify the lost revenue and profitability resulting from turning down small-business loans.

            Phelan believes that small-business lending has not yet reached the level of sophistication or efficiency found in the consumer market. “The constraint is not a lack of modeling expertise,” said Phelan. “It is a lack of relevant, predictive data on small businesses. We believe small-business lenders can do an even better job of determining and managing appropriate credit to the small-business segment. Until they do, banks’ small-business lending operations will continue to be a great source of new business – for their competitors."

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Founded in 1999, PayNet, Inc. is the industry’s largest repository of historical lease and loan payment information on the U.S. small-business community.  PayNet’s information is utilized on behalf of participating institutions to increase revenues, control risk and lower operating costs.  Its data covers more than $400 billion in loans on privately-held small businesses.