Author: Laurence Stock, Sr Dir-Product Strategy
Small businesses are more than a segment—they’re a powerful growth engine for local economies.
They create jobs, fuel innovation, and are often woven into the very fabric of their communities. Yet for too long, small businesses have struggled to access the capital they need to grow—and banks have struggled to profitably serve them. Now, with emerging technologies and smarter customer engagement models, that gap is starting to close.
Why small business lending matters—for everyone
Ask any small business owner what their biggest challenge is, and access to capital is likely near the top of their list. Many have gotten creative—piecing together funding from alternative lenders, credit cards, or personal loans. Bank-provided capital, while often more affordable, isn’t always easy to access. For banks, the small business segment presents a different challenge: how to lend profitably at scale without sacrificing service.
Despite these challenges, there’s a compelling business case for banks to prioritize small business lending. Small businesses not only represent future commercial clients and long-term deposit relationships – they're also a critical entry point for personal banking relationships., For community-focused lenders, providing access to capital for these businesses is a powerful differentiator, especially compared to larger banks that may overlook or underserve this segment.
The structural hurdles banks must overcome
One reasons banks have historically underserved small businesses is structural. Many institutions still struggle with where this segment “fits” internally. Is it part of retail? Or should it be treated more like commercial banking? Retail teams often lack dedicated lending specialists, while commercial lenders tend to focus on larger, more profitable deals, leaving smaller loan requests deprioritized. This misalignment can result in fragmented service models and inconsistent customer experiences that deter small business customers.
There’s also the profitability puzzle: small business loans are typically lower in value but carry relatively high processing costs. Understandably, many banks have been hesitant to dedicate resources when the economics don’t add up.
But that’s beginning to change.
The tech-enabled path to profitability
Today’s technology gives banks a way to serve this segment more efficiently and profitably. Digitization and automation are helping reduce the need for manual, human touchpoints – lowering operational costs while enabling faster, more consistent loan origination.
At the same time, modern credit tools allow lenders to better price for risk—bringing nuance and flexibility to an area that was once “one size fits all.” Small business owners are also willing to pay for convenience and speed. By streamlining applications and decision-making, banks can offer products that are easy to access and tailored to the customer’s risk profile—all while improving their own margins.
Meeting SMBs where they are
Small business owners don’t want to choose between digital and in-person service—they want both. They may start a loan application online but still want to have the option to walk into their local branch and talk to someone they trust. That’s why building omnichannel experiences is key.
The win-win? Banks can invest in self-service tools that lower operational costs while also equipping branch staff—who may not be seasoned lenders—to support lending conversations. By simplifying the process and enabling smarter decisioning behind the scenes, banks can make every point of contact a value add—enhancing customer experience while driving efficiency and growth.
Relationship management reimagined
While traditional relationship managers may be harder to scale, relationship banking is still very much alive. In fact, it's evolving. For many banks, the branch manager is the relationship manager for small business customers. With the right tools and training, these frontline staff can become powerful advocates—supporting both lending and deposit growth.
That brings another advantage: deposit stickiness. Lending relationships create a natural bridge to capturing operating accounts. Whether it’s a new customer bringing deposits as a loan condition or an existing client deepening their relationship with more products, lending helps build loyalty and reduce churn.
The role of AI in the lending lifecycle
The solutions that exist today can enable banks to successfully serve their small business customers, but artificial intelligence (AI) can transform how banks engage this segment. From guiding business owners through the application process to automating underwriting and routing, AI removes friction and adds intelligence at every step. It also helps banks serve a wider range of businesses by simplifying complex steps and making processes more intuitive—even for those with limited financial literacy. As these capabilities continue to evolve, AI has the potential to make small business lending more inclusive, efficient, and scalable than ever before.
Seizing the opportunity
Banks have a significant opportunity to turn small business lending into a growth engine of their own. By leveraging today’s digital tools and emerging AI capabilities, they can cut costs, enhance customer experience, and compete more effectively in an increasingly crowded market.
But doing so requires a mindset shift: from seeing small business lending as a tough economic tradeoff to recognizing it as a long-term investment in customer relationships, community presence, and future growth.
Small businesses are ready. Banks just need to meet them there—with the right tools, the right processes, and a smarter approach to service.
Learn more: https://www.moodys.com/web/en/us/solutions/lending/small-business.html