Small Business Lending Down: "Brother Can You Spare A Dime?"

Most of the recent news concerning small business lending has been focused on the steady decline since the recession. Banks large and small just aren’t lending and the trend seems to be continuing downward. Over the last couple of years I’ve read how there just isn’t demand and a myriad of other excuses. I’m convinced the one bright spot in news reported the first of this month by American Banker identifies the problem and maybe even a potential way to address it.

First of all, I don’t believe this is a matter of demand. At Lendio we see thousands of small business owners looking for a loan every month. If anything we see demand increasing. During Small Business Week, Lendio Co-founder and CEO Brock Blake broached the topic in a column he published on Forbes. And, American Banker validated the opinion in the report they released earlier this month. Loans of less than $100,000 by big banks seems to remain pretty steady.

When talking about the decline, J.D. Harrison of the Washington Post writes, “The lone exception has been loans of under $100,000 by large banks, which remain above the levels reported a decade ago and have shown some intermittent upticks in recent years…”

This is very consistent with what we’re seeing at Lendio and what Brock describes in his Forbes article.

When politicians get up and laud the virtues of small business, they bring to mind the Main Street type businesses you and I can identify with. Unfortunately, the SBA looks at those businesses and the $30 million corporation with 1,500 employees the same way they look at Main Street. And, because the SBA looks at small business that way, so do the banks. The system is geared toward big loans, despite the fact that most of the small businesses we can identify with thrive on loan amounts that are much smaller, making them too expensive for banks to even deal with.

Because most banks moved up the food-chain to offer loans to bigger, more established companies, many Main Street business owners, strapped for cash have turned to alternative lending sources (often at higher interest rates) to fuel growth and fun working capital. The place in the market that used to be filled by the community bank around the corner is slowing being taken over by these alternative lenders. What’s more, as more alternative (non-bank) lenders enter the space, the cost of this type of financing is coming down—which is a good thing for borrowers who are now realizing they have options they might not have looked at before.

I’m convinced that there are some distinct lessons we should be learning from the current state of small business lending:

1. It doesn’t take a lot of money to keep Main Street alive: For about the same amount as a nice car, most of the Main Street business owners visiting Lendio can buy the equipment they need, hire the employees they’re looking for, and grow their business. The SBA offers a “micro-loan” program to fit this niche, but it’s not enough. If we really believe Main Street is where the rubber hits the road and where jobs are created and is the heart and soul of thriving communities, we need to do a better job of addressing the financing needs of those businesses.
2. The process for acquiring smaller loan amounts (less than $100,000) needs to be streamlined: Admittedly, if it cost my community bank the same amount to process a $50,000 loan as a $250,000 loan, I’d probably focus on the bigger loan amounts too. I’m concerned the ultimate outcome of the status quo is that community banks will become irrelevant as business owners turn to other financing sources the community banks used to fill. It’s no secret that thousands of bank branches have been closing every year as acquisitions and consolidations have taken place already.
3. Savvy community bankers are bucking the trend: Last week one of the two banks recognized by the SBA as the top Small 7(a) loan lender was Eastern Bank. They decided to go online to offer small business financing services to business owners within their footprint—and they’re making a difference within their market. Fortunately for small business owners, Eastern Bank is the only community bank taking a different approach to small business lending.

I’m hopeful the recent data about small business lending will help motivate the SBA and the banking industry to rethink how they deal with small business owners and how they structure the loan products designed to help them fuel their businesses. I hope they’ll pay more attention to the financing needs of Main Street and figure out how to best meet those needs. I think we’ve reached a crossroads and it’s time for a small business banking paradigm shift to  keep our communities alive and thriving.