Here’s some good news for entrepreneurs seeking financing: Big banks are starting to look more favorably on small business loans again. A growing number of large banks are taking a second look at small business loan applications that had previously been rejected, The Wall Street Journal reports.
In these “second look” programs, banks review rejected loan applications. Some banks are giving rejected applications a second look automatically; others will do so if the loan applicant requests it. Some banks focus on looking for credit report errors that may have hindered the applicant; others do a full review of the entire application package.
The Financial Services Roundtable, an industry trade organization, says almost all of its 100 members, including Bank of America, J.P. Morgan Chase and U.S. Bancorp, now have second-look programs.
Giving applications an in-depth second look costs the bank more than a loan analysis based solely on credit scores. But it seems to be paying off for the banks: One bank told the Journal that second-look loans have the same overall performance as loans that get approval on the first application.
Are the programs making a difference? Of course, it’s still not simple to get a bank loan, but the most recent latest Federal Reserve survey of loan officers was encouraging, reporting that lending standards for small businesses had eased for the first time since 2006. “Around one-fifth of large domestic banks reported having eased lending standards for small firms,” the report states.
What’s behind the banks’ increased friendliness to small business? According to the Federal Reserve report, “Nearly all of the respondents that reported having eased standards or terms on [commercial and industrial] loans cited more aggressive competition from other banks or nonbank lenders … as an important reason for doing so.” The other half cited a more favorable or less uncertain economic outlook.
But while this part of the report was encouraging, there’s some less positive news as well. The Federal Reserve reports that at the same time large banks were easing their standards, “a small fraction of other banks” were tightening theirs. Most of these were smaller banks, which were tightening their lending policies because—in direct contrast to bigger banks–they believe the economic climate is getting more uncertain and less favorable.
Smaller banks and nonbank lenders have been a big resource for many small businesses seeking financing in the recession. If these financing sources tighten their lending standards, will the result be a net wash for small business?
Small Business Loan Blog
Good to see things are starting to pick up in lending to small business. Hopefully the small business bill will start stimulating more lending
Good to see that competition in the banking industry is generating benefits for SMBs.
This is a subject near and dear to my heart because over the past two years, our client base (lower middle market companies with revenues ranging from $2 to $50 Million) has been struggling to keep and/or gain capital from banks. Not a single one of them have ever missed a loan payment or not complied with the bank reporting requirements. It has been extremely difficult for small businesses!
What I see happening now is nonbank lenders stepping up to help out entrepreneurs. Their rates are higher, however their capital is keeping the doors open and in many cases allowing these entrepreneurs to hire employees! What is most impressive to me is the entrepreneur’s resourcefulness and tenacity to endure this recession.
Holly Magister, CPA, CFP
Once again we’re reporting what the banks say they are GOING TO DO IN THE FUTURE, without reporting how the dozens of other promises they’ve made have come to dust.
There is no reporting here about what the actual small businesses (under 20 employees) on the ground are experiencing (take a look at Holly Magister’s response – that’s the REAL truth), only what the big banks are saying they will do. Based on their performance over the last three years, why should we be paying any attention at all to what they say? Shouldn’t we just report what they do?
Anybody can say anything, and we have a few years worth of big government politicians and big businesses saying things and assuming that because they said them, we will believe they are true. Reporting them as if they were reality doesn’t help.
American Security Trust,SA makes working capital loans from 25,000 up to 100,000 without geographic restrictions. Visit http://www.americansecuritytrustsa.com and click the HOME tab for guidelines and application.