Increasing Small Business Loan Success
Helping Small Business Borrowers Through the Loan Process
Over the last 10 or 15 years we’ve watched the decline of community banks as they’ve either been consumed by bigger financial institutions or simply disappeared. The fallout from the Great Recession hasn’t helped small business lenders either. Just a couple of months ago the Federal Reserve Bank of Cleveland reported that although credit has eased for their larger siblings, credit is still tight for the smallest small businesses. Granted, the smallest small business carry a higher risk potential than do bigger small businesses, mid-sized businesses, and large businesses, but I can’t help but wonder if we’re being short-sighted in terms of economic growth by starving these businesses for funds.
Former SBA Administrator Karen Mills suggests two out of every three net new jobs are created in this space and with 1.3 million people losing unemployment benefits this month and another 3.6 million likely to do so before the end of the year, I wonder if it’s time to seriously invest in the smallest small businesses. Senator Reid suggests he’d support a temporary extension of unemployment benefits at a cost of roughly $25 billion (yes that’s billion with a “b”), which makes me wonder why the SBA, which is likely where any government action regarding small business lending would take place, has been stuck at right around the $30 million mark for the last few years.
Maybe small business would be a good place to invest some of that $24 billion?
I know there are challenges associated with lending to these smallest small business and a lot of reasons why traditional lenders aren’t excited to get on that bandwagon. Let’s dive into just a couple:
- There’s a lack of demand: I’m not sure I completely buy into this argument. In fairness, there probably is a lack of demand for small business loans of $250,000 or more. Last year the average SBA loan was roughly $380,000. The kind of loan the biggest small businesses (like a $30 million software company) might ask for. Growing up in a small business, a $40,000 loan was a huge loan for my Dad’s hardware business. Over the last couple of years we’ve seen an influx of alternative lenders providing financing options for small business owners in the $10,000, $15,000, and $25,000 range. Of course the cost of capital for these borrowers is greater than a fixed-interest SBA loan, but the loan products are also designed to fit short-term financing needs that are being unmet by many traditional lenders. Yes the cost is higher to the borrower, but doesn’t that mitigate some of the risks associated with these loans? I’m not convinced demand is down. I am convinced (so far as traditional lenders are concerned) that the problem isn’t that these Main Street businesses want too much, it’s that they aren’t asking for enough.
- Smaller loans are more expensive and less profitable to underwrite: I realize that some of this has to do with regulation. Nevertheless, if your loan processes are the same for a $50,000 loan as they are for a $500,000 loan, I can’t blame a bank who avoids the smaller loan and hunts for the bigger fish. That said, there are bankers who are streamlining processes for specialized loan products and offering single-page applications with approvals in a day or two. Banc of California’s equipment loan program is one such bank. Other banks have chosen to absorb the costs because they see the economic value to their communities for lending to Main Street. Holladay Bank & Trust in Utah is one of them. Fortunately, with the SBA removing fees on 7(a) loans of $150,000 or less, some of those costs just came down for SBA lenders. It seems Acting Administrator Jeanne Hulit and I agree we need to encourage more small business lending in the amounts Main Street is looking for. I hope this is the first step the SBA takes to make it more appealing for traditional lenders to do so.
- Small business owners simply aren’t prepared or credit worthy: The most universal complaint I hear from lenders is that small business owners fail to present a well articulated plan when applying for a loan. One lender suggested, “If I know more about their business by looking at the numbers than they do, I’m likely not going to give them a loan.” A valid criticism to be sure. Another friend suggests, “It’s not the banks job to fix your credit.” Another truism. I just wonder if that attitude is beneficial to the long-term health of small business lending. Main Street business owners usually aren’t financing experts and come to the bank not just looking for a loan, but for someone to help them navigate the process. How much more powerful and meaningful would a relationship be with their bank if the loan officer helped them understand the loan process, where they fall short, helped them overcome those obstacles, and acted as a partner? That’s what they’re doing at Banc of California and Holladay Bank—which is why their stories are so meaningful to me. Doesn’t it also make sense to help those potential borrowers with less than perfect credit? Any investment made in education would likely generate substantial returns. Short-term loans designed to build a positive credit history and educate small business owners could be one way to create lasting relationships with small business owners.
The challenges facing small business and small business lending are complicated and have no easy answers. That being said, I’m convinced we need to look at those challenges from a different paradigm. I don’t think there’s too much disagreement that what we’re doing now isn’t working. Small businesses, and particularly the smallest small businesses, are where the lion’s share of jobs are created in this country. It seems like a very smart investment to me.