The biggest banking challenges of small businesses

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The biggest banking challenges of small businesses

Aside from the previously identified issues, there are several challenges facing banks and small businesses. A 2017 survey suggests that the main challenges causing dissatisfaction among small businesses are linked to the speed at which the business is growing, with faster-growing businesses being the least satisfied. Issues around business accounts, advice from bankers, bank transfer processes, and a lack of flexibility also present as ongoing challenges. Of course, COVID-19 is probably the biggest challenge facing both banks and small businesses currently. The impact is still to be determined but will depend in no small degree on the effectiveness of government relief packages, and the time the economy remains on hold.

Banking Satisfaction

  • There are many challenges for small businesses in the service they receive from banks. The JD Power US Satisfaction Survey in 2017 illustrated some of the issues between small businesses and banks. The challenges are especially pronounced when the small business is fast growing.
  • The JD Power Survey found that 22% of fast-growing small businesses had changed banks in the previous 12 months, compared to 5% of slower growing small businesses. Further, 25% of fast-growing small business owners indicated that they planned to switch banks in the following 12 months.
  • Possibly due to the nature of the market, fast-growing small businesses are especially vulnerable to problems, so much so that when they experience an issue, they are 57% more likely to change banks. The main challenge for fast-growing small businesses was the inability to access loan facilities in a timely manner. This contributes heavily to customer dissatisfaction.

Fractured Small Business Account Opening

  • The banking community, in general, often does not serve small businesses well. In many instances, they fail to recognize that the owners of startups often have little practical experience in how to build a lasting relationship with their bank. This is compounded by the lack of clarity from banks around how to open new business accounts.
  • There is a lack of information provided by banking institutions regarding the documentation required to open a business account. While commonsense goes some of the ways, it does not completely resolve this issue. Articles of Incorporation, identification, and taxation information are relatively self-explanatory, but depending on the country, several additional documents are required.
  • One of the most common flow-on effects is that many small business owners forgo opening a business account and instead rely on the owner's personal account. This creates many issues in terms of cash flow, separating business from personal finances, and taxation.
  • It also means that the small business fails to establish a credible banking history with the bank, meaning the ability to access business loans or credit cards in the future is restricted. While in the short term, this may be considered less of an issue, in the long term, especially if the business is growing, it has the potential to impact negatively on that growth when necessary products are not available due to the lack of an established banking history.
  • One of the most common mistakes made by US small business owners is opening the business bank account using their own social security number, rather than the Federal Employer Identification number. This is especially common when business bank accounts are set up online.

Lack of Experienced Advisers

  • The issues around opening a business account are further complicated by a lack of qualified advisers in the banking industry that focus specifically on small businesses.
  • While most small business banking advisers are very proficient in the small business product line and understand transactional banking, they lack the experience to comprehensively advise small business owners on the products and services that are the best fit for a specific vertical or business setup—for example, credit line vs. overdraft vs. loan, each with their own advantages and disadvantages.
  • For a number of small business owners, the first port of call when opening a business account is their personal bank. This may not be the best fit for their business, and a lack of advice, coupled with inexperience, means that this is often not readily identified.

Inefficient Funds Transfer Process

  • The banking system is very much orientated around the premise that small businesses have accounts with only one banking institution, which in a number of instances, is, in fact, the case. There are, however, many small businesses that operate accounts across more than one banking institution, in order to find products that best meet their needs.
  • For a small business, this presents an ongoing challenge when there is a need to transfer money between different banks. Often the transfers are not in real-time and, in many instances, take at least 24 hours to clear. This presents a challenge to the small business owner looking to transfer money from one account to another quickly, and in a worst-case scenario can create short term cash flow issues.

Zero Flexibility

  • Larger enterprises have the power to demand a bank adapt a credit line or service so that it best fits the needs of the enterprises. Given the business that the enterprise brings to a bank, there is an incentive to create a solution when something is less than a snug fit.
  • Small businesses, especially when they are starting up, do not have this same power. In many instances, the lack of an established history means that they are unable to access products that are fundamental to their growth. Banks often offer zero flexibility to small businesses, even if there is an easy way to meet the demands of the small business.

Government Regulation

  • In recent times small businesses have had to cope with the additional costs of government compliance with a number of regulations. In many instances, the burden falls unfairly on small businesses, who cannot rely on the principles of economies of scale. Whilst this is largely unrelated to their relationship with their banking partners, in the post-COVID-19 era there is a high probability this will change.

Unforeseen Expenditure

  • Unforeseen expenditure is often the downfall for many small businesses, and this is the most likely issue that will arise out of the COVID-19 pandemic. The effects of the lock down globally will limit cash flow and place many small businesses under financial pressure. Although most governments globally have offered "assistance" to businesses, the success of these packages does not guarantee the survival of a small business.
  • The banks will have pressure placed on them to extend loan terms and payment dates, but they too have commitments that must be met. There is a limit to how much leeway banks will be able to extend to small businesses, to the extent it would not be unfair to predict a relatively rocky road in the relationship between small businesses and banks in the immediate future.
  • The impact of COVID-19 on the relationship between banks and small businesses will not be fully realized until the impact of the various government relief packages has been assessed. If the packages measure up, in terms of the support needed, then the effect between businesses and banks will be limited.
  • However, there will be increased pressure on banks to pick up the slack between the government relief and small businesses' needs, the longer the lock downs and the shutdown of non-essential services last. Banks will face increased scrutiny as small businesses will be backed by public sentiment.