By Joseph Lowe, Sageworks
Millennials are expected to dominate 44 percent of the workforce in the next four years, and they’re aiming to take their careers in a new direction: entrepreneurship.
According to the 2016 BNP Paribas Global Entrepreneur Report, millennials around 27 years old are setting out for entrepreneurship in droves, rather than settling into jobs at Fortune 500 companies. To capitalize on this trend, it’s important for community banks and credit unions to consider:
- How entrepreneurs are building the revenue to start companies, and
- What advantages community banks have over large banks and online lenders within the small business lending (SMB) sector.
The U.S. small business lending industry is a $700 billion business serving more than 58 million employees working in 29 million small businesses. Despite numerous reports, startups are steadily declining overall. In fact, from the late 1970s to the early 2000s, around 500,000 to 600,000 new U.S. startups formed each year. In 2014, only 452,835originated, marking a nearly 40-year low. The reasons for this are abundant, though some point to two main reasons the state of small business is struggling: access to consistent cash flow is limited and small banks are reluctant to invest in small business lending.
Millennials have been touted by some as the entrepreneurship generation. Unfortunately, most millennialsare lacking the most important factors involved in forming a company: money, reliable employment and limited debt.
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MILLENNIALS LACK A CONSISTENT CASH FLOW
According to data compiled by Fundable, 57 percent of startups were funded largely in part by an entrepreneur’s personal savings or credit and 38 percent involved heavy investments from friends or family. While the latter may not be available, the majority of millennials don’t earn enough funds to start a business solo. For those who were gainfully employed from 2009-2013, the median earnings for full-time workers between 18 and 34 was $33,883.
While the job market has continued to grow, employment is still not easy to come by for millennials. In 2015, young adults aged 20-34years old accounted for more than 40 percent of the unemployed. For millennials without a college degree, those statistics worsen. A Georgetown University report states the economy has added 11.6 millionjobs, and only 80,000 of those jobs went to individuals without at least some college education. Despite the gig economy, offering self-employment services such as Uber or Lyft for extra funds, millennials are settling for moving back home with parents to save funds and avoid high apartment costs or working multiple jobs to make ends meet. For those millennials who cannot move back home, they face a mounting burden of college debt coupled with rising costs of living. Graduates from the class of 2016 are burdened with $37,172 in student loan debt, on average, and struggle to afford basic necessities such as healthcare. While millennials can stay on healthcare until 26 years old, nearly 3 in 4 millennials failed to pay their medical expenses in full when first billed in 2016 according to a CNBC report.
COMMUNITY BANKS ARE REGULATED AT A HIGH RATE
Today, three major lending groups serve small businesses: large banks, community banks and online alternative lenders. Community banks can often lack the technology and resources needed to handle loan origination, loan administration and loan decisioning as quickly as big banks and alternative lenders. Another hindrance for small banks is an increased regulatory burden in response to the 2008 Recession. Between the Financial Accounting Standards Board’s (FASB)current expedited credit loss (CECL) model, the Dodd-Frank Act and the Federal Reserve’s interest rate policies, it is difficult for small banks to keep up. The average ratio of compliance expenses to noninterest expenses can be as low as 2.9 percent for banks with assets of $1 billion to $10 billion yet as high as 8.9 percent for banks with assets of less than $100 million. According to the Institute for Self Reliance, one in four local banks has shut its doors since 2008 in part due to strict regulations and net interest income. Community banks derive nearly 80 percent of revenue from interest income, which can become a problem if interest rates are extremely low in a competitive environment. Large banks account for low interest rates by charging additional costs, such as checking account fees.
However, community banks have a unique opportunity to lead the resurgance of small businesses and millennial entrepreneurship across the United States. Traditionally, community banks have led both large financial institutions and independent lenders in relationship lending, which is a driving factor for small business lending and millennials. Building personal relationships and local ties to small communities are benefits that the competition cannot parallel. However, loan origination and loan decisioning, processes that used to take weeks, are expected to be completed in hours thanks to new lending technology. Large banks and alternative lenders adopted technology quickly and gained a large share of the small business loan market, but it’s not too late for community banks to tap into technology advancements.
Millennials expect a quick and convenient loan application process, which can be provided with an online loan application and electronic tax return reader, eliminating time sucked up by manual data entry for both banker and borrower. Some online loan applications allow borrowers to import asset account information from third-party financial institutions with login credentials, which allows for a fast loan application process for all parties involved. Not only does this save time for the borrower, but the lender can devote less time to gathering paper documentation that can take days to compile. This is particularly important for borrowers with low earnings or poor credit scores that may need guarantors to get a loan approved.
After gathering documentation, spreading software can automatically build a personal financial statement for the lender with asset account and credit report information. This also increases efficiency, lessens the rate of error for lenders and ensures sound decision-making based on consistent rules.
Once approved, customized loan documents can be sent to the client through an easy-to-use client portal, and all other client communications can be handled through a relationship manager. Millennials prefer speedy automated processes and can be sent approval or follow-up messages instantly once the loan has been evaluated.
It’s no secret that millennials are digital consumers. Banks—of all sizes—continue to seek opportunities to appeal to the millennial generation, and technology continues to be a primary enabler. Community banks, in particular, have a unique opportunity to combine their advantages in relationship-based lending while tapping into new lending technology to provide the ultimate lending experience for millennial entrepreneurs, and make small business lending a profitable growth area for their institution.
Joseph Lowe is lending marketing manager at Sageworks, where he produces educational content to lead banks and credit unions in transforming their credit and lending processes to optimize for efficiency and a better borrower experience. He can be reached at [email protected]