Small Business Lending May Not Be as Bright as Recent Surveys Suggest
New data suggests the economy is on the mend, and that small business owners are reaping the benefits as banks start to lend again.
But a closer look suggests circumstances may not be so rosy.
"If you are lucky enough to be in the top 10 percent of small businesses, banks will fight to give you loans, but it's not any different than during the recession," says Ami Kassar, founder and chief executive of Multifunding, a small business loan brokerage. Kassar says larger banks are now more aggressively courting the most successful small businesses with the strongest balance sheets and income statements, after years of looking the other way.
Certainly big bank lending appears to be picking up, with the number of approvals for bank loans between $25,000 and $3 million notching up a half a percentage point from June to 17.4 percent, and more than six percentage points from July 2012, according to Biz2Credit, an online loan broker for small businesses that works with 1,100 lenders, including banks. (See chart below.)
(Source: Biz2Credit, which analyzes primary data, including tax returns, from 1,000 small companies that have been in business two years or more, and that have credit scores of 680 or above.)
In July, Biz2Credit counted 3,935 applications for credit, a 23 percent increase over July a year ago. Its match rate to big lenders increased 7 percentage points to 24 percent, while its match rate to smaller lenders increased 7 percentage points to 59 percent. A match rate does not necessarily mean a small business owner will pursue a loan with a particular institution, Rohit Arora, chief executive of Biz2Credit, says.
"After four years housing prices have stabilized, and for lots of small businesses, their assets are tied up in their homes, and the majority of banks look at the business financial and personal financial statements," says Arora.
What the Big Banks Report
Two of the nation's biggest small business lenders, Bank of America and Wells Fargo, say they have experienced substantial increases in their small business lending, though both say they have not changed their lending criteria.
Bank of America, which says it has 3.2 million small business customers, increased small business loan originations in the first half of the year by 26 percent to more than $5 billion.
"The environment to lend money is much better today than it was two to three years ago," says Robb Hilson, small business executive for Bank of America, who says balance sheets, cash flow, liquidity, and the personal financial statements of small business owners have all improved in the past year.
Wells Fargo, which has 2.5 million small business "households," increased small business loan originations 25 percent to more than $9 billion for the first half of the year, compared to the first six months in 2012.
Both attribute the growth in originations to increasing their network of small business banking employees in the past year. Bank of America added 1,000 small business bankers, while Wells Fargo added close to 2,000 small business specialists across its nationwide footprint.
"We are seeing an improving economy and better balance sheets and cash flow, but some business owners are cautious about hiring and taking on new debt," says Lisa Stevens, lead executive for small business for Wells Fargo.
Big Bank Loans Rise, While Small Banks Get Squeezed
While big banks appear to be spending more dollars marketing to small businesses, new big bank loan customers may come at the expense of the smaller banks, which seem to be approving fewer loans, according to Biz2Credit. Last month, approvals dropped for the same set of businesses at small banks by nearly half a percentage point to 49.4 percent of all small business loans compared to June, continuing a downward trend since April, when small bank approvals peaked at nearly 51 percent.
Smaller banks lack the marketing dollars, brand name recognition, product diversity, and lower rates of their larger peers, which may mean small business owners go first to large banks when they want loans, experts say.
Nevertheless, small banks stepped up to the plate when credit markets froze during the worst part of the recession, throwing an important lifeline to small business owners when larger banks fled the market. And in their desperation to find financing, small business owners also turned to alternative lenders that provide capital against receivables, equipment, and inventory, among other things.
"Lending did slow down in the downturn, but some of the regional lenders stuck with us," says William Brigham, director of the Small Business Development Center at the University at Albany, commenting on the lending environment for entrepreneurs around the state capital.
Total Dollars in Small Business Loans Continue to Fall, But Signs of New Activity
Total dollar volume for all small business loans has steadily decreased since 2008, according to the Small Business Administration's small business lending report for 2012. Small business loans of $1 million or less fell by 3 percent to $588 billion in 2012. In 2008, total small business loan volume was $711 billion. (Banks appear to be making more smaller value loans, as the dollar volume of loans $100,000 or less grew by nearly half-a-billion dollars, while higher amounts decreased.)
Meanwhile job growth, wages, and gross domestic product are all stagnant, says John Dunham, managing partner of economic consultancy John Dunham & Associates, of New York. Big banks are courting entrepreneurs heavily now because they've tapped out other loan markets, such as mortgage refinancing.
"Small business creation has been awful over the last few years, and that is the dynamic part of the economy, and that is why the demand for small business loans has not been there," Dunham says.
Demand, however, appears to be increasing. The Federal Reserve's Senior Loan Officer Survey for July reported a general easing of loan policies for commercial industrial and commercial real estate loans from banks, which have experienced stronger demand for these products over the last three months. Eighteen percent of large banks reported easing their lending standards somewhat, compared to 10 percent of smaller banks.
Among the standards banks use to judge their loan candidates are credit scores, age of the business, debt to asset ratios, and industry. While banks are probably not relaxing their financial standards, they are starting to look at industries that appeared riskier during the recession, such as construction, or logistics and transportation, Arora says.
"Quite a few large banks have launched projects for financing these industries," Arora says.