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It doesn’t appear that the recession is what has caused the small business lending slowdown. It appears the decline in flow of money to Main Street started long before 2008. “Cleveland Federal Reserve analysts published the paper last week, which indicates that the flow of loans to small companies remains very slow and is not likely to pick up anytime soon,” writes J.D. Harrison for the Washington Post. “In addition, as you can see below, their findings show that the relationship between small firms and banks started to grow cold more than a decade ago, at a time when the economy was still expanding.”
Please don’t interpret this as an indictment against banks—it isn’t. In fact, there are a number of highly motivated banks (along with credit unions and non-bank lenders) that work with us at Lendio, who are ready and anxious to provide small business loans to Main Street. Nevertheless, I don’t think we can ignore the fact that traditional lending to small business is in decline and in many cases, small business owners are forced to look into alternatives to the bank to find the financing they need.
Harrison outlines a number of the factors that have contributed to the decline, and they point at small business as well as the bank. He says,”…weak financials from the past few years and declining property values have made it difficult for small business owners who want loans to quality for credit, particularly because banks have heightened their lending standards in the wake of the recession.”
Although many small business owners have discovered they have options to the bank, I still believe a healthy relationship between community banks and local businesses is good for Main Street. I understand that the last few years have been hard on small business owners. Robbing Peter to pay Paul may help a business owner stay afloat, but it can be devastating to his or her credit rating—severely limiting their options at the local bank.
Bankers by nature are risk averse. If you wait until you are in dire straights to approach your local banker, odds are he or she will say “no.” With that in mind, here are a few of the things the bank (or any other lender for that matter) will want to see to make sure you’ll be able to repay a loan.
Over the last couple of years alternative (non-bank) lenders have stepped up with cash for Main Street business owners. And, as more companies enter the field, the cost of this type of financing has come down. However, I question whether Main Street can stay alive unless we reverse the trend of the last last nearly 20 years and get the community bankers, who have traditionally been where small business went for financing, back in the action.
There is no silver bullet or magic pill we can take to turn things around. I’m suggesting community banks start looking at additional loan products that might fill the gap between the loans they’re writing now and the small business owner loan requests they’re turning away. There are a number of banks across the country successfully doing this. The SBA needs to make it more attractive for banks to participate in more micro-loans. The Feds need to relax some of the regulations that hamstring banks regarding the types of borrowers and the types of loan products they can offer—I think the risk aversion pendulum has swung to far. And, small business owners need to shoulder some of the burden and take responsibility for their poor financial health.
I’d love to hear from those who’ve had great success with the local bank as well as any banker who is taking an innovative approach to the Main Street lending challenges we all recognize. Feel free to share them here or reach out to me personally.
Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business best practices, tips and advice accessible by weaving personal experiences, historical references and other anecdotes into relevant discussions about leading people, managing a business and what it takes to be successful. Ty writes about small business financing and other best practices for Lendio, in addition to sharing his passion for small business every week on Forbes.com.
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Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business financing and trends accessible in common sense language devoid of the jargon.
Small Business Tools
7 min read • Aug 12, 2022