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Reimagining relationship banking

for small businesses

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Published on: April 2024

Written by: Rene Groeneveld, Lawrence Nixon

While small and medium-sized enterprises (SMEs) play a vital role in driving economic growth and innovation, they often face unique challenges when dealing with banks. This makes relationship banking crucial to their success. By strengthening their relationship banking models, banks can differentiate themselves from competitors by improving the support they provide to SMEs, helping these businesses overcome challenges and thrive in the marketplace.   

In discussions with owners of SMEs about their experiences with banks, four common concerns emerge:    

  1. Access to credit. Obtaining financing for purposes such as working capital, expansion, or equipment purchase is a significant challenge for SMEs. Banks often perceive them as riskier borrowers due to their limited credit history, lack of collateral, or volatile revenue streams, which can make it difficult to secure loans. 
  2. High interest rates and fees. SMEs may face higher interest rates and fees compared to larger, more established businesses due to banks’ perception of greater default risk, as well as limited financial transaction volumes. 
  3. Complex application processes. SMEs often face time-consuming and complex loan application processes, requiring extensive documentation such as financial statements, tax returns, and business plans. 
  4. Inflexible lending terms. SMEs may struggle with inflexible lending terms, including strict collateral requirements, short repayment periods, or covenants that restrict operational flexibility. These terms can make it difficult for SMEs to manage cash flow and invest in growth. 

By adopting the following approach, relationship managers can help businesses overcome these challenges: 

  • Advocate for clients within the bank, helping them secure financing for business expansion, capital investments, working capital growth, and asset accumulation. 
  • Offer guidance on optimizing cash resources within the constraint of limited capital resources. 
  • Provide advice on managing personal wealth accumulated through business ownership. 

This approach requires a set of knowledge and capabilities: 

  • Business acumen—an understanding of SMEs’ unique needs and business challenges. 
  • Recognition of the essential role cash flow plays in small business success and an understanding of how to optimize it. 
  • Familiarity with the financial impact of bank products on SMEs’ finances. 
  • Understanding of small business funding models, including the roles of owners, banks, and investors. 
  • Insight into the migration of SMEs to medium-sized enterprises. 

Equipped with these capabilities and this knowledge, bankers can employ critical relationship management skills at four key stages: 

  • Planning. Gain local market knowledge and industry/sector expertise before engaging with clients. 
  • Discovery. Approach SMEs with a focus on their unique needs, recognizing the distinct characteristics of owner-managed and owner-financed businesses. 
  • Engagement. Position offerings from a client-impact perspective, rather than a bank- product perspective, addressing the specific needs and challenges of SMEs. 
  • Closing. Adopt a partnering approach and act as an advocate for SME clients within the bank, particularly when dealing with credit functions and decision-makers. 

By focusing on these areas, banks can enhance their relationship banking model for SME customers, providing personalized support and tailored financial solutions to help small businesses succeed in a competitive landscape. 

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