Why Banks Still Aren't Lending to You
It's official: Banks are lending to businesses again in a big way--unless you're a small business. According to FDIC data released today, U.S. commercial & industrial loans totaled $1.5 trillion as of December 31, 2012, a 12 percent increase from the year before, surpassing the high-water mark set in the second quarter of 2008. Meanwhile, small business lending continues to plod along: Loans with initial balances under $1 million increased just 0.4 percent, to $284 billion, 17 percent below the pre-recession peak.
"There really hasn't been much of any recovery" for small businesses, says Scott Shane, a professor of economics at Case Western Reserve University. "You could make a case it's no longer declining…[but] it's all far below where it was before the recession."
Overall, total commercial loans rose for the 10th straight quarter. With interest rates so low, large companies are increasingly borrowing money to buy inventory and acquire smaller competitors, says Richard Bove, a banking analyst at Rafferty Capital Markets. Meanwhile, as beleaguered European lenders have retrenched from U.S. shores, large American banks are picking up the slack, driving the numbers up further.
But most banks haven't warmed to small businesses the way they have to their larger counterparts. Only nine percent of senior loan officers said they increased credit limits or eased covenants for small businesses, according to a January survey by the Federal Reserve, compared to 19 percent who said they'd done so for mid-sized and large companies. Smaller loans are still considered riskier and costlier, says Glenn Goldman, chief executive of Capital Access Network, which helps small businesses find credit. "It's much more efficient to devote time to a single $1 million transaction than to twenty $20,000 transactions," Goldman says.
Entrepreneurs themselves remain skittish. Only six percent of owners believe the next three months will be a good time to expand, according to National Federation of Independent Business Owners February 2013 Small Business Economic Trends report, and the majority of respondents believed business conditions would be worse in six months.
"People who have credit available are not using it," says Marc Bernstein, head of the small business segment at Wells Fargo. In 2012 the San Francisco-based bank increased lending commitments to businesses with less than $20 million in revenue by $16 billion, or 30 percent. The actual amount of debt utilized in these kinds of smaller credit lines remained flat in the fourth quarter. "Small businesses started from a point of more fragility," says Bernstein. "We're just starting to see small businesses say they're expanding."
"[Small business owners] are very optimistic about their own ability, but concerned about what they don't have control over," says Robb Hilson, an executive at Bank of America's small business group who used to oversee middle-market loans for the Charlotte, North Carolina-based bank. Over the past 24 months, Bank of America has hired 1,000 bankers to specialize in small business. New loans to businesses with less than $20 million in revenue increased 28 percent in 2012, says Hilson. Overall, the bank has extended small business loans totaling $19 billion, according to the latest FDIC data, up 15 percent from a year ago. The economic picture is still far from rosy—and small businesses have less tolerance for risk than larger, better-capitalized businesses. "Clients are feeling better today than they were a couple of years ago, there's no question," says Hilson. "They're just cautious about buying that next piece of equipment."