Traditional small business lending by the major banks is falling again. As these larger financial institutions continue to extend less credit small business owners are left to fend for themselves. Normally this would hurt the economy, however there are many lending institutions filling the gap. Private lending companies and smaller regional banks are bringing stability to the lending sector and quite possibly contributing positively to the health of the overall economy.
In a recent article published by Bloomberg the largest banks loan output in the first quarter shrunk almost 5% to 3.04 trillion. Considering how critical small businesses are to local and national economies it is surprising that this economic behavior continues. According to Bloomberg, the reason for the tightening is “The big banks are trimming assets to satisfy stricter capital rules and regulatory demands to dispose of risky loans.” It seems the major banks are protecting their bottom line without any concern for the nation’s small businesses.
The response by the smaller regional banks and the private business loan companies has been the difference in the strength of many of America’s small businesses. According to the statistics available lending by 3 quarters of the banks in the KBW Bank Index has surged almost 10%. Merchant cash advance companies have also seen notable increases in applications and funded deals. According to Sam Baitz at Shield Funding, one of the fastest growing MCA providers, closed deals are up almost 17% in the first quarter. Would it be better for the economy if the larger banks contributed more to small business lending or is the increasing supply by smaller banks and private lenders better for the business loan industry?
There is no doubt that the larger banks can certainly offer better rates because of the cost of borrowing for them, however, lower rates is not the complete picture. For instance, merchant cash advance companies can fund some businesses in as little as 24 to 48 hours. That incredible turnaround can be the difference in the success and failure of a business. In fact, there are many other factors that make merchant cash advances a better option than even business loans offered by the smaller banks. Because a business cash advance is based on monthly revenues and not the individual applicant, these lenders can extend credit to even the worst credit score applicants.
It doesn’t seem like the larger banks are going to be extending more credit any time soon. And there are some economic questions that can only be answered with time. For now, small businesses do have lending options in regional banks and merchant cash advance companies. It is even possible that as these smaller lenders close the credit gap they will build long lasting relationships with local businesses where the larger banks will no longer be a welcome lender. It will be there loss, and well deserved for abandoning small businesses when they needed business loans when they matter most.
Sam is an expert in small business financing and has been CEO at Shield Funding for more than a decade. The company has funded more than 1000 small businesses and has been a significant contributor to the phenomenal growth that many of those companies have experienced.
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