As alternative lenders and online competitors proliferate, traditional banks with high overhead could see their customer base erode.  With high origination expenses, processing and infrastructure requirements, Profitability of Commercial Loans at banks becomes problematic for many.  For this reason, it is imperative that bank officials recognize loan costs and improve loan returns either internally or by taking advantage of a partner’s capabilities.

Although some banks have spent millions to simplify operations and risk management to retain positive loan returns, too many banks are not familiar with their loan economics.

To correctly determine a small business loan cost, banks must quantify certain bank costs including loan origination, underwriting, review, operations, monitoring, collections and compliance.  One peer-reviewed estimate puts the total cost of a $100,000 or less loan at $3,100 to $3,700.  Banks which make few small business loans see higher origination costs.

Post-crisis compliance and regulatory concerns have significantly increased non-origination costs resulting in higher costs for small business lenders.  For instance, new regulations have driven banks to hire compliance officers that add to bank overhead but not revenue.  Reporting requirements and privacy issues mean continuous monitoring costs.

To overcome a loss-producing environment banks have several choices:

  • View profitability more holistically with lending being the loss leader in fostering small business relationships in areas such as personal loans, deposits, cash management, owner investment and other products sales.
  • Expand cross selling to support the small business customer’s sales loan cost.
  • Instead of focusing too much energy on compliance and risk, improve bank processes.
  • Liaise or partner with a third-party on lending to lower costs, increase productivity and meet customer borrowing needs.  For example, an alternative finance partner may offer enhanced risk management and operational platforms.

Banks can use internal or partner technology to enhance overall customer satisfaction, control expenses and generate more non-interest income.  Please contact us to take the mystery out of commercial loan pricing.  Our PULPS software tool is a Big Bank technology tool that helps all banks and credit unions understand and improve loan profitability.

Alan Lee