FDIC Says Small Business Lending Survey Reaffirms Importance of Local Relationships

In an annual report, the FDIC highlighted the importance of local in-person relationships to small business lending, despite an increase in the use of FinTech solutions.  

In its 2024 Small Business Lending Survey Report, the FDIC said that the traditional relationship-oriented approach to lending remains essential. Key findings from the survey, which received responses from 1,300 banks, included the following:

• most banks retain the risk of the small business loans they issue, with only a small fraction selling loans on the secondary market;
• approval processes are generally efficient, with many banks able to approve small (under $1 million) and simple loans within one business day;
• the use of FinTech solutions is increasing, particularly for regulatory compliance and post-approval processes; 
• small business borrowers are typically located within close proximity to bank branches, underscoring the importance of local relationships; and
• the competitive landscape is shifting, with increased competition from credit unions and FinTech lenders, alongside traditional banking peers.

In remarks at a Federal Reserve Bank Community Banking Research Conference, FDIC Chair Martin Gruenberg emphasized the role of community banks to the US financial system. He said community banks account for 90 percent of FDIC-insured institutions and remain essential to the economic health of local communities. He said that the Small Business Lending Survey shows: (i) that the advance of technology has not fundamentally changed the relationship-based nature of small business lending at community banks (noting that small business loans are still largely underwritten and approved by people); (ii) the enduring importance of branch networks and staff in fostering relationships with small business customers, (emphasizing that 80 percent of banks define their lending markets by branch location, and that most borrowers are located within 40 miles of a bank's branches); and (iii) that community banks are more likely than large banks to gather and use "soft" information—such as a loan officer's personal assessment—during the underwriting process, particularly for smaller loans.

In further support of community banks, Mr. Gruenberg also said they tend to have decision-makers who meet with small business applicants, allowing for a more comprehensive evaluation. He underscored that this hands-on approach helps community banks extend credit to a broader range of small business borrowers, especially those that may not qualify for loans at larger institutions.