There are very different reasons behind a small business ($100K-<$10MM in sales) planning to change their primary bank compared to adding a new bank. In Barlow Research’s most recent 3Q14-2Q15 data, we saw that just 5% of small businesses were planning to change their primary bank in the next year; another 12% were not sure. But for those that said they were planning to change primary banks, the top reasons were because of general service and fees/rates. Eleven percent of small businesses indicated that they had added a new bank other than their primary bank in the last year. The top reasons for doing this were because of credit/lending and for products. This is the way for small businesses to test out a new bank before deciding if they want to fully switch over to them.
There were not major differences by sales volume for the percent of small businesses that planned to change and/or added a new bank. The top reason for each of these activities was also the same, regardless of sales size. But we found that there were differences in these activities when we looked at the company’s present life stage.
Businesses typically progress through different life stages. From just getting started (development), to growing every year (growth) or to struggling, but planning to grow (attempting growth), to maintaining, but not growing (maturity) and finally to slowing down (decline). The majority of small businesses indicated that they were in either the maturity stage (38%) or the growth stage (35%). Sixteen percent were in the decline stage, 10% in the attempting growth stage and just 2% in the development stage.
Although the attempting growth stage was just 10% of all small businesses, this stage had the highest percentage of companies planning to change primary banks at 14%, as shown in the graph below. That’s nearly triple the small business average. This group of companies also differed from the norm on their top reason for planning this change. As the table below shows, 38% of companies in this stage that were planning to change primary banks cited credit services as a reason. Those planning a change in the growth stage most frequently cited fees/rates, while those in maturity or decline cited general service; both of these reasons were in line with the top reasons of the average small business.
As stated above, small businesses often add a new bank as a way of testing it out prior to pulling the trigger and actually switching primary banks. When we look at the percent of companies adding a new bank based on life stage, we find that companies in the growth stage were more likely than the average small business to have added a new bank in the last year, 15% compared to 11%. Their reasons for doing so were in line with the average small business – for credit/lending and products.
We do once again see something interesting with those in the attempting growth stage. As shown below in the graph, just 9% of companies in this stage indicated that they had added a new bank in the last year, similar to the small business average. However, their top reason for doing so was to diversify or for back-up options (shown in the table below). It seems that this group, in their attempt to grow, reached out to other institutions as back-up, but they eventually planned to switch primary banks because of credit. It is likely that their primary bank denied them credit and/or the new institutions gave them more favorable terms and/or rates.
It is important to pay attention to your small business customers that are in an attempting growth stage. They likely are having difficulties of some kind and could be looking to other institutions to help them get by. If a credit opportunity occurs and the primary bank either turns the company in this stage down or has less favorable terms than one of the back-up options, it is likely that the primary bank could lose this relationship. Make sure to keep an open dialogue going with companies in this stage of business to see how you can help them succeed in growing.
For more information about this research or Barlow’s Small Business Banking Program, please contact Sandy Hanson at (763) 253-1824 or email@example.com.
Sandy Hanson joined Barlow Research in 2004 and collaborates with Linda O'Connell on the Small Business Banking program and John Barlow on the Middle Market Banking program. Her primary responsibilities are to manage the survey research aspect of the programs and to work with clients to meet their various research needs. She collaborates in writing the Small Business and Middle Market Banking annual reports and In-Depth reports. In addition to her work on the Small Business and Middle Market Banking teams, Sandy has extensive experience with custom research in the middle market business segment. Sandy graduated from the University of Wisconsin-Superior in 2002 with a Bachelor's of Science in Psychology. She then went on to receive a Master's of Science in Applied Psychology at the University of Wisconsin-Stout in 2004. In her free time, Sandy enjoys spending time with her two pet boxers, listening to live music and traveling.