By partnering with microlenders well-suited to funding new businesses, banks can maintain relationships with their small business clients and better position themselves to compete with unregulated fintechs.
Consider Eastern Bank’s relationship with the microlender Accion East, an East Coast arm of the globally operating Accion. Accion East’s Boston office has made at least $10.5 million in loans since it was established in 2000. At least some of those loans have resulted from referral partnerships like the one the microlender enjoys with Eastern Bank.
“We find that we come across lots of businesses that we really believe in and really support. We may even visit them and shop in their stores but we can’t help them,” said Pedro Arce, vice president of business banking at Eastern Bank.
That might be because the business is a relatively new one and hasn’t yet reached the point of profitability or may not have three years of cash flow statements. Sometimes the business owners have bad credit or no credit. Moreover, many of those small business owners come from underbanked areas.
At least 60 percent of Accion’s borrowers are first-time borrowers, said Andrea Ierace, manager of lending for New England. The average loan size is around $10,000 to $12,000, and Accion charges an interest rate a little bit higher than a typical bank loan, usually around 9 to 16 percent, but Ierace notes that many of those customers would only otherwise have access to credit through credit cards, which can often carry a much higher interest rate.
Though the relationship took some time to develop in the post-recession years the two entities started working together, Ierace said the partnership really took off once they better aligned with Eastern’s strategic goals – emphasizing, for instance, a coaching culture that helps new entrepreneurs manage their financials. The relationship has now produced about 50 referrals that turned into loans at Accion.
“It definitely helps [the bank] to retain the relationship,” Ierace said. “Without this partnership, a client knocks on the door to a bank, the bank says no, and he takes all his accounts and moves to another bank.”
Ierace said that Accion also has referral partnerships with several other banks in Massachusetts, including Blue Hill Bank, Boston Private and TD Bank.
“We value their relationship tremendously,” said Anna Bautista, a commercial loan officer at Boston Private. “It allows us to provide solutions to our clients. They may be existing deposit clients who have a financing need we aren’t able to support. We want to take care of our clients and one way we can do that is by developing relationship, such as the one with Accion.”
In addition to referring small business clients, Boston Private has provided funding to Accion, usually in the form of a grant to support its operations.
Blue Hills Bank has also enjoyed a robust referral partnership with Accion. Kelvis Camilo, a senior small business relationship manager, estimates that he’s referred at least 15 or 20 small business clients to Accion in the four years that he’s worked for Blue Hills Bank. Those businesses often include family-run daycares, hair salons and convenience stores, and many of those businesses are minority-owned, too.
“If you don’t meet our guidelines, that’s where Accion comes into play. Andrea is always willing to go the mile with my customers,” he said. “After they get approved by Accion, they become Blue Hills customers because ‘Blue Hills didn’t say no to us.’”
Symbiosis & Survival
Besides the obvious benefit to the bank (keeping a customer happy) and to the business owner (access to capital), the relationships make sense for banks that want to survive and compete with alternative lenders emerging in the fintech space.
Christine Barry, a research director with the Boston-based Aite Group, authored a paper earlier this year outlining alterative lenders’ incursion into the small business lending space. That report was based partially on an Aite survey of 1,000 American business with under $20 million in annual revenues.
The group wanted to gauge how many of them had used, or might use, alternative lenders. While alternative lenders’ penetration into the small business banking space is still low at this point, Barry notes in her report that according to the U.S. Treasury, the portfolios of alternative lenders have doubled every year since the mid-2000s and that 26 percent of the businesses Aite surveyed said they would probably or definitely consider using an alternative lender the next time they need credit.
“It makes sense for banks to partner with alternative lenders by referring clients they are unable to approve for loans to maintain their relationships. It enables banks to offer another option and continue to help their clients rather than push them away,” she told Banker & Tradesman via email. “As small businesses need more and more bank products, and fintech companies are increasingly offering more and more bank products, banks must do whatever is necessary to maintain their partnerships and trusted advisor role to [small and midsize businesses].”
And bankers like Camilo are reluctant to let their small business customers navigate the wilds of business borrowing on their own, often for the first time.
“I know the technology is advanced, but I think having a real banker in front of you is so important,” he said. “It’s having that mentor or trusted advisor that makes the difference.”
