There has been a lot of controversy lately over who is responsible for the small business community’s struggles with finding loans. Any business owner looking for a small business loan today knows how difficult it can be to find a lender willing to give their business money. Since the financial collapse of 2008 the access to working capital has fallen dramatically. The actual statistics from the Federal Reserve show that in the last quarter of 2012 the total value of industrial or commercial loans below $1 million was almost 80 percent less than mid 2007 levels. To make matters worse there has been an increase of over 100,000 small businesses during this same time period. Banks continue to say that there is less demand for their services but recent data suggests the real reasons for the absence of funding.
Many pundits and bank industry insiders say the lack of business loans is because of the decrease in demand for funding requests. This response is difficult to believe with the troubled economic environment along with a surging number of small businesses. Even if there was a decrease in optimism or a lack of profits to motivate expansion, this would be counterweighted by other small business owners that need funding just to survive in a difficult economy.
There are two strongly supported reasons for the decrease in small business loans that challenge the idea that there is a lack of demand as suggested by banking officials. First, according to the Federal Reserve banks tightened their lending standards for 4 years straight following the crisis, creating stricter standards year over year. This tightening was a reaction to the regulators applying pressure on the industry, calling for stronger suitability requirements after so many home loans failed because borrowers were unable to afford their loans. The combined actions from both banks and regulators have had a huge impact on the creditworthiness of small business owners today making most of them unsuitable for bank lending.
Also, banks have recently gone through consolidation and are offering less credit to small businesses because this type of lending is generally less profitable than most other types of lending. Some additional data from the Federal Reserve suggests that banks have loosened the standards for lending to big companies yet have maintained the same strict lending standards for small businesses. This behavior is the result of the banks trying to gain the larger profits involved with providing loans to bigger companies. So where can small business owners go to find working capital to grow their business?
If you search the internet for small business loans you are likely to get inundated with banks and the Small Business Administration website pages discussing your options for business loans. The problem with the SBA is that they do not directly give business loans to companies and actually only support the underwriting done by banks. The banks have demonstrated that through both profit seeking motives and regulation they have been decreasing the amount of business loans available for several years now with no clear change in sight. With no other options available small business owners have increasingly been going to alternative business loan companies to find relief.
Private or alternative lenders pool together private money to provide funding for small business owners. These lenders have been overwhelmed with business loan applications over the last two years. According to Sam Baitz, CEO of ShieldFunding.com, one of the largest internet resources for business loans, “The industry has seen significant growth recently because of the tight credit environment and the growing number of small businesses.” Also, more and more alternative lenders are entering the space because of the demand from small business owners for loans, a demand that banks say doesn’t exist.
Although there is likely a lot of macroeconomic data that can help both sides of the argument, there is good reason to believe banks are partially responsible for the lack of small business loans. As banks continue to remain on the sidelines and rates become more competitive in the private sector more and more small business owners will rely on alternative lenders for their business financing needs. This result will put an end to all the controversy.
For a detailed analysis about the data used in this article visit: http://www.clevelandfed.org/research/commentary/2013/2013-10.cfm
For more information on the SBA and bank business loans visit:
http://www.sba.gov/category/navigation-structure/loans-grants/small-business-loans
https://www.wellsfargo.com/biz/loans_lines/
For more information on alternative business loans visit Shield Funding.
