Small businesses play a key role in local economies by creating jobs and driving innovation. However, many small business owners continue to face challenges in accessing affordable capital, often turning to alternative lenders or personal loans when bank financing is not readily available. Banks, on the other hand, have found it difficult to serve this segment profitably due to structural and operational hurdles.

One of the main issues for banks has been determining where small business lending fits within their organizations. Retail banking teams may lack dedicated lending specialists, while commercial bankers tend to focus on larger deals. This can lead to fragmented service models and inconsistent experiences for small business customers.

Additionally, the relatively low value of small business loans compared to their processing costs has made it hard for banks to justify dedicating resources to this area. Despite these challenges, there is a strong case for banks to prioritize small business lending. Small businesses are not only potential future commercial clients but also represent opportunities for long-term deposit relationships and deeper customer engagement.

Technological advancements are helping address some of these barriers. The digitization and automation of loan origination processes allow banks to reduce manual touchpoints and operational costs while improving speed and consistency in decision-making. Modern credit tools enable more nuanced risk pricing, moving away from a one-size-fits-all approach.

Banks are also focusing on building omnichannel experiences that combine digital convenience with personal service at branches. By investing in self-service tools and equipping branch staff with better training and technology, banks can enhance both efficiency and customer satisfaction.

Relationship management is evolving as well. Branch managers increasingly act as relationship managers for small business clients, supporting both lending activities and deposit growth. Lending relationships often lead to increased deposit "stickiness," strengthening overall customer loyalty.

Artificial intelligence (AI) is expected to further transform small business lending by streamlining application processes, automating underwriting tasks, and making services more accessible—even for those with limited financial literacy. AI-driven solutions could help make lending more inclusive and scalable.

Laurence Stock, Senior Director of Product Strategy at Moody's Analytics, commented: "Small businesses are ready. Banks just need to meet them there—with the right tools, the right processes, and a smarter approach to service."

More information about how technology is shaping small business lending can be found at https://www.moodys.com/web/en/us/solutions/lending/small-business.html