Key takeaways:
- When a bank denies a loan request, they risk losing deposit accounts, future lending revenue, and the entire relationship as the business grows.
- The true cost can’t be measured because banks can’t predict future growth. The denied loan could have sparked significant expansion, but now the deposits, refinancing opportunities, and referrals belong to a competitor.
- Grow America partners with banks to fund deals you can’t approve in-house, keeping deposit relationships intact and creating refinancing opportunities as businesses grow.
What does it cost to lose a small business client? This is a difficult question to answer and the consequences aren’t always immediately clear. Think about this example:
A bank declines a $250,000 business loan because it fell just short of their criteria. The business turns to a competitor who approves the loan, taking their deposit accounts with them. While denying the loan seemed like smart risk management, this loan becomes the catalyst for the business’s growth and it doubles, triples, or even quadruples in size.
How much revenue did the bank that declined the loan actually lose?
The answer is that it’s impossible to calculate. When a loan denial results in lost deposits, fees, referrals, and more, the cost of losing the relationship will never be known. It’s invaluable.
The good news? There’s a way to retain this value without taking on additional risk. But first, let’s examine exactly what’s at stake when a small business relationship walks out the door.
Three ways losing a customer costs your bank
The lending landscape is complex, which makes it easy to underestimate what you’re actually losing when you deny a loan. The cost isn’t just difficult to calculate; it’s often far more valuable than the loan itself. Here are three reasons why losing a customer means losing something invaluable.
The immediate financial costs: Acquisition
In nearly every business, customer acquisition is one of the most difficult and expensive aspects, and banking is no exception. Banks spend hours underwriting deals they ultimately decline, and when you calculate the actual cost per rejection—including staff time, systems, and overhead—institutions can burn thousands of dollars just to say no. These relationships don’t have to be written off as complete losses when partnership options exist.
When you deny a loan request from a small business owner and watch them pull their deposits, your marketing investment to acquire that customer also becomes a complete loss.
When you deny a loan request from a small business owner and watch them pull their deposits, your marketing investment to acquire that customer also becomes a complete loss.
The mid-term financial costs: Lost deposit relationships
Small business lending is just one aspect of a banking relationship. Companies often keep their deposit accounts at the same bank where they have their loan. In fact, a 2023 report found that when small businesses have a lending relationship with a bank for 36 months or more, their deposit balances are more than double that of businesses that don’t have a lending connection.
“We’ve seen businesses that couldn’t get a $30,000 loan take their $200,000 in deposits to another institution,” says Bryan Doxford, President of the Grow America Fund. “Declining their loan without offering another option isn’t risk management,” he continues, “that’s leaving money on the table.”
The deposit loss extends even further. When a business moves its accounts, its employees often follow. “We’ve seen a strong connection here,” says Doxford. “Employees tend to bank at the same institution as their business, as they’re exposed to a bank’s brand through payroll and 401K programs. This means when a business leaves, the bank loses potential future employee relationships that would have developed naturally.”
The irony is clear: by declining a loan to protect against risk, the bank funds a competitor’s deposit growth instead.
The long-term costs: Reputation and referrals
Small business communities are typically tight-knit and personal recommendations are key. A local advisor, professional or business owner can influence many others within their city or industry. “I work with hundreds of small business clients at a time,” said Emily Duran, Director of the Launcher Program at West End Neighborhood House in Wilmington, DE. After a few of them were rejected by the same bank without any support, I stopped referring anyone there.” Ultimately, the bank lost access to a reliable source of referrals.
Business owners have long memories. A company rejected for a $250,000 loan rarely returns when they need $2 million. They stay loyal to whoever helped them get to a “yes.” Meanwhile, each rejection ripples through referral networks as brokers and advisors redirect future clients to more flexible institutions.
The partnership solution: Recapturing lost value
The challenge is clear, but so is the solution. Partnering with a non-depository lender like Grow America allows you to say ‘yes’ to the relationship even when you have to say ‘not yet’ to the loan.
The model works because the incentives align. Lenders like Grow America and other CDFIs specialize in deals that fall just outside traditional bank criteria—businesses that are promising but need more runway. When we take on the credit risk, you retain the deposit relationships that often grow substantially as the business succeeds.
Banks partner with Grow America specifically so they can keep business relationships even when they can’t approve loans in-house. Instead of losing customers entirely, they maintain the deposit relationship and often bring them back for refinancing once they’ve grown.
That refinancing pathway is particularly valuable. “We graduate tens of millions of dollars from our books back to bank balance sheets annually,” says Doxford. “The bank kept the relationship without taking on early-stage credit risk. They get the loan back when it’s lower risk and the business is more established.” You haven’t compromised your lending standards—you’ve just found a way to say “not yet” instead of “no.”
Retain the Relationship with a Second-Look Lending Partner
Remember that $250,000 loan you declined? The one where the business took their deposits to a competitor, grew significantly, and never looked back? That scenario plays out in banks across the country every day, costing institutions millions in lost deposits, referrals, and future lending opportunities.
You don’t have to choose between prudent lending and relationship retention. There’s a middle ground that protects both.
Grow America works with banks to turn loan denials into relationship opportunities. Instead of losing the customer entirely, you keep the deposits and create a path to bring them back when they qualify.
Ready to protect your deposit relationships? Contact Grow America to explore how a partnership could work for your institution.