Small Business Lending After the Recession

The Challenge of Finding Loans

In recent times, there has been significant debate over the difficulties faced by small businesses in securing small business lending. Post the 2008 financial collapse, access to working capital through small business lending has seen a drastic decline.

Federal Reserve statistics indicate that, by the last quarter of 2012, the total value of industrial or commercial loans below $1 million, a key component of small business lending, was almost 80 percent less than mid-2007 levels. This situation has been exacerbated by the increase of over 100,000 small businesses during the same period. While banks argue that there is reduced demand for their small business lending services, recent data suggests otherwise.

The Reality Behind Reduced Loan Approvals

Misconceptions About Demand

Many pundits and banking insiders attribute the lack of small business lending to decreased demand for funding. This explanation seems implausible given the challenging economic environment and the increasing number of small businesses. Even if some business owners are less optimistic or less motivated to expand, many still require small business lending to survive in a difficult economy.

Stricter Lending Standards

There are two primary reasons that challenge the notion of decreased demand for small business lending. First, banks have tightened their lending standards for small business lending over four consecutive years following the crisis, driven by regulatory pressures demanding stronger suitability requirements. This response has significantly impacted the creditworthiness of small business owners, making many ineligible for small business lending from traditional banks.

Bank Consolidation and Profit Motives

Additionally, bank consolidation has led to reduced credit availability for small business lending, as lending to this sector is generally less profitable. Federal Reserve data shows that while banks have loosened lending standards for large companies, they have maintained strict standards for small business lending. This trend reflects banks’ preference for the higher profits associated with lending to larger companies over small business lending.

Alternative Funding Sources

The SBA and Government Resources

A search for small business loans online often leads to numerous banks and the Small Business Administration (SBA) discussing loan options. However, the SBA does not directly provide loans; it supports underwriting by banks, which have reduced business loan availability due to profit motives and regulatory pressures.

Private and Alternative Lenders

With limited options, small business owners are increasingly turning to private or alternative lenders. These lenders pool private money to fund small businesses and have seen a surge in loan applications over the last two years. According to Sam Baitz, CEO of Global Pacific Advisors, the tight credit environment and growing number of small businesses have fueled this industry’s growth. As banks remain on the sidelines, alternative lenders are stepping in to meet the demand for business financing.

Conclusion

While macroeconomic data can support various arguments, it is evident that banks play a role in the scarcity of small business loans. As more small business owners rely on alternative lenders, the controversy surrounding bank lending practices may diminish.

For a detailed analysis of the data used in this article, visit Federal Reserve Bank of Cleveland.

For more information on SBA and bank business loans, visit:

• SBA Loans
• Wells Fargo Business Loans

For more information on alternative business loans, visit Global Pacific Advisors.