Banks Continue to Fail Small Businesses
For local businesses, especially for smaller industries, obtaining a bank loan has been very difficult. Small businesses comprise a large portion of the business population. To put it in perspective, based on IRS records regarding businesses that filed taxes in 2003 (the most recent year with available statistics), of the almost 27, 486,000 total businesses, about 26,226,000 or approximately 95 percent had less than $1 million in total revenues. It is apparent that a very large majority of businesses operating in this country are small business yet it seems that getting these businesses the financing required to grow is very difficult
According to Reuters, since November 2010, small business borrowing has increased by 18%. This number does not detail the much larger percentage who needed the small business loans. In a Wall Street Journal article written by Emily Maltby, it has been reported that business owners are ranking “access to capital” as one of the most vital issues that their businesses face today. Only approximately 18% of small scale businesses can attest that they were granted their desired bank financing. Instead, business credit lines are being drastically reduced and owners are being pushed into credit card accounts that generally offer higher interest rates. Some credit card rates reach as much as 30-40% or about five times that of a conventional business loan and the amounts offered do not cover the growth requirements of a business.
The most common and traditional funding resource for businesses are banks. However, the reputation of big banks hasn’t been remarkable for the last couple of years, beginning with the financial crisis and to add to that, the Occupy Wall Street demonstrations. Moreover, small businesses have been the underdogs of a lowly economy and this has granted them support from the Congress. So, the Big 4 of US banking, namely, Bank of America, Chase, Citibank and Wells Fargo, were all keen to issue small lending statistics for 2011 that would appear impressive. However, the concern is that majority of these loans may have been allocated and granted to business that are not of small scale nature.
For the purposes of providing business loans, the country’s four largest banks described small businesses as those that have annual revenues amounting to at most $20 million, which is an amount that is far beyond what a lot of businesses in the nation will ever reach. This definition is different from that of government institutions who adopt the Federal Deposit Insurance Corp. definition; small businesses being those with $1 million or less total revenues.
A conflict arises because the big banks show reports of positive small business lending whereas almost 61 percent of small business owners claim that it has been more difficult to obtain a loan today as compared to four years ago. So in other words, due to the big bank’s definition of small businesses, these big banks provide loan to so-called “small businesses” that are much closer to the $20 million on the revenue scale, because of the lower lending risks of higher business revenues. Due to having a separate definition of what can be classified as a small business, it appears as if the business lending of big banks for small business has increased but in reality they are actually lending too much larger scale industries.
Because of this struggle, many businesses resort to other good alternative funding sources. Several types of business loans are available for business of all types in the private sector. There are ACH loans, merchant cash advances, collateral loans and unsecured business loans, among many others. These small and private lenders have helped many businesses in funding for working capital, debt payments, the purchase of equipment and many more business transactions.
Overall, small business still continue to struggle in obtaining business loans from traditional business lending institutions and much more from large banks. Small businesses highly impact the economy because of its large volume, so financing institutions should encourage further growth of small businesses by granting more loan opportunities for these types of companies.