Solo entrepreneurs find a match in community financial institutions

Sole proprietors, independent contractors, or even solo entrepreneurs. No matter what you decide to call them, these smallest of the small businesses represent a unique opportunity for community banks and credit unions.

A recent BAI study revealed that 79% of small business owners use the same financial institution for their personal and business accounts.ⁱ  Quite often, the needs and preferences of solo SMBs closely mirror those of the business owner, allowing community banks and credit unions to serve both, expanding customer wallet share without the need for more extensive commercial platforms.

Understanding the Needs of Solo SMBs

Since many solo business owners operate as independent contractors or sole proprietors, they have no employees and claim income on their individual tax return. Their banking needs are naturally simplified compared to that of a larger SMB and often limited to a business checking account.

However, it is important that community banks and credit unions not lose site of the lending needs of sole proprietors or even the needs of the one-man shop. According to the Federal Reserve Banks’ 2019 Small Business Credit Survey covering non-employer firms, 71% of solo SMBs want to expand their business, but only 26% have applied for any kind of financing.ⁱⁱ  Instead, solo SMBs rely on personal funds, borrow from family and friends or use a personal credit card before seeking a business loan.ⁱⁱⁱ

With no commercial credit history, non-employer firms are often passed over by financial institutions when it comes to receiving business loans, despite the fact that 58% are considered a low credit risk.^iv  This became particularly evident as the federal government began supporting Paycheck Protection Loans in response to the COVID-19 pandemic.

Sole proprietors who represent 81% of all small businesses,^v  found it difficult to access PPP funding, even when approaching their own financial institution. Fintech lenders took advantage of the opportunity to fulfill solo business needs, issuing $4.7 billion in loans and becoming the fourth largest supplier of PPP financing to date.^vi

In the process, fintech lenders took more than lending business from community banks and credit unions. These tech-savvy market entrants also stole customer loyalty.

A COVID Loan Tracker survey reveals that customer satisfaction with many primary financial institutions dropped dramatically as businesses went through the PPP application process.^vii  Nearly a quarter have considered ending their current banking relationship.^viii

Seizing the Opportunity in Solo Business Banking

By 2027, solo small business owners or freelancers will account for the majority of the workforce, according to a study conducted by Edelman Intelligence,^ix  and they represent a unique opportunity for community banks and credit unions.

Nearly a third of financial institutions are facilitating commercial clients from retail platforms that lack business-specific products and services.^x  For larger employer firms, this attempt to square peg commercial clients into a round hole results in low satisfaction. In fact, 67% of SMBs say their bank does not offer services they would be willing to pay money to receive.^xi

The needs of the solo SMB, however, more closely mirror those of a consumer, allowing community banks and credit unions to extend customer wallet share and instill loyalty without heavily investing in commercial platforms.

Consumer lending platforms make it possible for community lenders to satisfy both the personal and business needs of solo SMBs without heavy investments in commercial platforms.

Lenders should consider a complete loan origination system, offering streamlined processes and workflows, as well as a flexible online portal that reduces the need to enter duplicative data. When pairing the right set of solutions financial institutions can remove many of the manual steps associated with underwriting and automate credit score considerations, rules and internal policies, to reduce the total time to cash and remove potential credit risks.

The financial institution of tomorrow will be largely built on the business of solo SMBs, and the financial institutions that can meet their needs today will be positioned for the lion’s share of their business.

_{ⁱ  “New BAI Research Study: 79% of Business Owners Use Same Financial Services Organization for Personal and Business Financial Needs.” Businesswire. BAI press release, Apr. 11, 2019. Web.
ⁱⁱ  “Small Business Credit Survey Report on Nonemployer Firms.” Federal Reserve Bank of New York, 2019. Web.
ⁱⁱⁱ  ibid.
^iv  “Small Business Credit Survey: Report on Nonemployer Firms.” Federal Reserve Bank of New York, 2019. Web.
^v  Lori Ioannou. “Clock Ticking for Small Businesses Squeezed out of Government Loans, Now Have a Few months or Less to Survive, Survey Reveals.” CNBC. CNBC Make It, May 4, 2020. Web.
^vi  “Paycheck Protection Program (PPP) Report.” U.S. Small Business Administration, Jun. 30, 2020. Web.
^vii  “Covid Loan Tracker: Bank Satisfaction Tracker.” Retrieved from https://www.covidloantracker.com/bank-satisfaction-tracker. Jul. 23, 2020.
^viii  “Covid Loan Tracker: Bank Satisfaction Tracker.” Retrieved from https://www.covidloantracker.com/bank-satisfaction-tracker. Jul. 23, 2020.
^ix  Rieva Lesonsky. “The State of Freelancing in America.” Score, Jun. 21, 2019. Web.
^x  Ibid.
^xi Ibid.}