Small Business Lending In 2015
A Look Back At Year 2015
2016 so far is looking like a huge year for Alternate, Non-Bank lending
Small Business Lending In 2015
May 19, 2015 @ 11:55 AM
While the economy is growing and things are getting better for businesses in the U.S., access to capital is still a challenge for many business owners. Traditional small business lending, which sharply contracted following the start of the recession, is showing signs of life; but while some banks are trying to bring small business customers back, Ernst & Young suggests, “The post-crisis environment has been characterized by [small business] companies’ willingness to move material parts of their banking business if presented with a more attractive option. Relationship breadth or history alone is no longer enough of a deterrent to prevent switching.”
In other words, small business owners are feeling (and these are my words not E&Y’s), “While my long-term relationship with your bank does matter to me, if you can’t come through for me when I need you, I have no other option than to find someone else who will.”
In this regard, E&Y identifies, “Nearly one in five companies report
having changed its primary bank in the past year…” No matter how you slice it, that’s a lot of customers jumping ship.
The report’s author, Bill Schlich, suggests access to capital is one of the key reasons cited for making a change. As a result, post-crisis, traditional small business lenders have to adapt to a different world.
Regarding access to capital, I’m a big fan of the role community and regional banks have traditionally played along Main Street as a source of capital to fuel growth and fund operations. Unfortunately, according to Karen Mills, a Senior Fellow at Harvard Business School and the former Administrator to the U.S. Small Business Administration, “Small businesses claim that loans are still difficult to get during the recovery.”
It appears (and I’ve said this before), that banks are moving upstream to bigger and potentially more lucrative business lending. In fact, Mills corroborates this by adding, “Small business lending continues to fall, while large business lending rises. In an absolute sense, small business loans on the balance sheets of banks are down about 20 percent since the financial crisis, while loans to larger businesses have risen by about 4 percent over the same period.”
There are those who might suggest the decline in traditional small business lending is a market correcting itself. I suppose that could be part of the answer, but I don’t agree. I think the reasons are a little more complicated than that. While not the only reason, I’m convinced, as Mills suggests, “The banking industry in the aggregate appears increasingly less focused on small business lending.”
Fortunately for small business owners, non-profit lenders, crowdfunders, and other online lenders are stepping up to fill the gap. These lenders are often leveraging technology to access creditworthiness, underwrite and service loans traditional lenders can’t or don’t want to service anymore.
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It’s hard to blame them when, as Mills describes, underwriting small business loans is a challenge for banks because of the heightened risk associated with small businesses and, “Transaction costs to process a $100,000 loan are comparable to a $1 million loan, but with less profit. As a result, banks are less likely to engage in lending at the smallest dollar level.”
This is particularly true when many of the small businesses we’re talking about are looking for loan amounts even smaller than the $100,000 loan mentioned above. Last month, while speaking at the Lendit Conference in New York, Mills suggested 51 percent of small business owners are looking for loans below $100,000 and 39 percent were looking for loans below $50,000.
Non-bank lenders, according to FDIC call reports cited by Mills, suggest that total debt capital outstanding as of 4Q 2013 for small businesses was up 175 percent for online lenders while down 3.1 percent for banks during the same period. While still a very small percentage of the total outstanding small business debt (banks still own the lion’s share), I can’t help but wonder what the future holds for small business lending.
Small business is a critical part of the economy in the United States and a business owner’s ability to access capital is an important part of creating jobs and building strong communities. Although the average loan offered by the SBA is closer to $400,000 than $40,000, the agency recognizes how important it is to provide those smaller loans and started encouraging their lenders to do so by eliminating fees on loans under $150,000 a couple of years ago. And the SBA recently increased its partnership with credit unions to offer smaller SBA loans to a credit union’s business customers.
As a result of what non-bank online lenders are doing, the efforts of a forward-thinking SBA Administrator in Maria Contreras-Sweet, and those community banks that have elected to stay in small business lending, there are more options available than ever before for business owners seeking capital. That being said, the shifting landscape might require a borrower to look in different places than in the past, be more informed about their available options, and be able to clearly articulate why they need the loan and how much they really need to make informed decisions about what loan will work best for their business. The bank, while still a good option for many loan purposes, might not be the only (or the best) option any more.
Banks, business owners, and other lenders are feeling the earth shift a little beneath their feet these days. The world is changing—in my opinion, for the better.