Are banks becoming more willing to lend to small companies? In recent months, most of the major banks have announced intentions to increase small business lending, to hire additional staff to deal with small business loans, and to give small business loan applications they had previously rejected a “second look.”
And in fact, recent statistics bear out that those intentions were followed up with action. In the third quarter of 2010, the Wall Street Journal reports, Wells Fargo issued $3.9 billion in small business loans, up from $3.3 billion in Q3 2009; Bank of America made $5.7 billion in small business loans, up from $4.1 billion in Q3 2009; and Chase made $2.7 billion in small business loans, up from $1.9 billion in Q3 2009.
But while at first glance these numbers may seem promising, they don’t tell the full story. Bankers acknowledge that most of these loans are going to bigger small businesses—those with between $1 million and $20 million in sales. That means there are plenty of small companies seeking capital and not getting it. According to a study released in October by the Federal Reserve Bank of New York, 59 percent of small businesses had sought financing in the first half of 2010—but more than three-fourths of those got only “some” or “none” of the money they wanted.
If the banks say they’re eager to lend, but entrepreneurs say they can’t get financing, what’s the disconnect? It appears the entrepreneurs who fail to get loans aren’t the “right” kind of entrepreneur. According to the same Federal Reserve Bank study, during the first half of 2010 the businesses that were most likely to get bank loans had a five-year track record, showed positive revenue growth, and had self-financed during the lowest points of the recession.
Bankers cited by the Wall Street Journal acknowledge that they are being more selective about companies’ creditworthiness; banks are leery of being burned. Banks are also focusing on industries less affected by the recession, such as health care, while entrepreneurs whose overall industries still hurting from the downturn—such as restaurants—may have trouble getting money even if their businesses are growing.
There may be other factors at work here. Despite the large percentage of entrepreneurs who sought loans in 2010, I think many entrepreneurs are gun-shy about taking on any debt until the economy stabilizes further. With memories of banks calling in loans and pulling lines of credit still fresh in many small business owners’ minds from the early days of the recession, plenty of entrepreneurs are unwilling to put themselves at risk again.
Those who have found ways to get by for the past two years without turning to outside sources may see little reason to do so now. But pulling this economy permanently out of the doldrums will require more than “getting by” –it will require growth and expansion, both of which require access to capital.
What’s your take on the capital crisis? Is it ending, is it over or is it still affecting your business? I’d love to hear what solutions you’ve found when the banks say no.
I feel that I could be quite a asset to the community where I live if I was able to get a small business loan to start a business that I have been envisioning for more than a year but with the climate and unrecoreded restrictions that banks have placed on their lending policies (including government underwritten)it is virtually impossible for me and many others like in the low qualification category like myself to get access to any bank capital.
In fact, I have made several attempts to get bamk assistance only to be turned down. While they will NOT tell me specifically why I am turned down I know it has to do with my credit history.
Since many of us are facing this real problem I am inclined to say that the Government should interven and if that is not found as a sound solution then what is needed is a more innovative approach to this problem that will only get worse over time.
I’m the owner of a “big” small business, which began in 1985. For the most part, banks haven’t been loaning to start-ups for nearly 30 years. In general, the only way banks will fund a start-up is with an SBA-backed loan. I solicited financing for 16 months in 1983-1985, a mere $189k. No bank would touch my project – and I have degrees in Accounting and Economics and had just completed a 5 year tenure with Arthur Andersen (in the Division that is now Accenture). Banks want asset-based lending only – and that’s been the case for as long as I can remember. Granted, my company is well-estabished and has a successful track record, but I can get all the money I want – to fund the purchase of assets. I tried to borrow for acquisitions but NO bank wants any part of that. My point is that this is not a new phenomenon. It’s just getting a lot of focus as a result of the sluggish economy.
Although I would tend to agree with Gerard, and being in the commercial real estate industry I deal with many small businesses (which should be further defined), and I can tell you that lending is virtually non-existence. I think the problem is so many small businesses and individuals for that matter, think lending will go back to way it was 2002-2007 which it won’t for another 15-20 years which appears to be the cycle. The reason for this cycle is the people that should remember have since retired or passed away.
Rieva, you asked for our take on this. We are a small business and we service the small business market. Our PEO business, Four Point HR, had several clients ask us to float their payroll since they had money coming in that they couldn’t access yet, but needed to pay their people. As a result, we developed PAYgrow Payroll Financing through Four Point Capital: http://www.fourpointcapital.com. PAYgrow provides capital to small businesses by allowing them to fund payroll on terms, turning a normal, predictable expense into a source of cash. Goal is to help small businesses to increase working capital, improve cash flow, and take advantage of growth opportunities.
Nothing encapsulates the issue better than your statement:
“Bankers cited by the Wall Street Journal acknowledge that they are being more selective about companies