When JPMorgan Chase released its fourth quarter earnings for 2013, it announced that it had provided $19 billion of credit to U.S. small businesses. The figure sounds impressive, but it pales in comparison with the $589 billion of credit that it provided to big corporations.
This should not surprise anyone. The country’s biggest banks ($10 billion+ in assets) actually prefer to provide capital to “small businesses” that average $10 million in revenue or more. While, it is encouraging that the spigot has opened and big bank loan approval rates for small businesses reached 17.6 percent, according to the December 2013 Biz2Credit Small Business Lending Index, many of them are primarily interested in lending to large “small businesses.” (Yes, that is an oxymoron.)
For many of the big banks, small loans are paper intensive and thus cost more to process. This is a reason why they prefer to offer non-SBA loans, which typically require more forms and documentation and, as a result, take longer to process.
Small banks, which typically do not have the same type of brand recognition, cannot afford to be as choosy. Often, they are a secondary choice as consumers tend to go to the names they know first. Further, because of the amount of advertising that big banks have invested in advertising to promote their small business loan-making, entrepreneurs are going to the bigger players.
Unfortunately, although big bank lending approval rates are currently at post-recession highs, they do not approach the percentage of loan applications granted by small banks (almost 50 percent). Alternative lenders, comprised of microlenders, cash advance companies, are approving more than two-thirds of their requests.
Here Is How Things Can Change:
1) As they continue to be thwarted by big banks, borrowers will continue to comparison shop and seek alternatives to the big banks. Many will use the Internet to find the best deals. Small business owners will secure capital from community banks, alternative lenders, and increasingly, institutional investors that are hungry to make deals.
2) Big banks can improve and upgrade technology. It is still astounding that many of the biggest financial institutions in the country do not allow for online loan applications or eSignatures. What makes this so perplexing is the fact that the large, name brand banks have more vast resources to invest in upgrades.
One can look at the mercurial rise of alternative lenders as proof that when there is a void in the marketplace, the hole is quickly filled. Accounts receivable and cash advance lenders used their technological advantage and made capital more readily accessible. In many cases, speed is often more important to borrowers than low interest rates.
For instance, if you need working capital to make payroll, you cannot wait three months for an SBA loan. Employees want to be paid in a timely fashion and likely won’t wait around for a long period of time without payment.
A number of the large banks, such as TD Bank, Union Bank and others, are investing in upgrades and becoming more active in small business lending. Look for others to follow suit in 2014.
Bank Concept Photo via Shutterstock
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From the bank’s perspective, small business loans are a higher risk for a lower payoff. Thankfully, as I talk about on my site, there are other options to small businesses like asset-based loans. Usually these types of loans are not difficult to obtain for companies with sizable accounts receivable or hard assets.
I guess this is good news to most small business owners. Sean is right when he said that this is because most banks think that these loans pose higher risk. But it is still good to hear that they are now considering small businesses who make a considerable amount of money.
Small banks, which do not have the same type of brand recognition, cannot afford to be as choosy as compared to the bigger banks with more clout.
Yes. but it is surprising when big banks that really have nothing to lose help out small business owners when they really have more than their fair share of lenders.
It makes perfect business sense for large banks to loan to larger businesses (whether they are classified as small businesses or not) because they have larger payouts and less risk. That will almost always hold true. However, the cost of processing a loan could be reduced by reduced government regulations and digital technologies, which would help get more small loans approved.
The costs related to processing a loan are largely passed on to the borrower. The majority of those costs are related to underwriting and due diligence, not regulations.
Large banks see that the same amount of work goes into qualifying a $10M loan as a $100K loan. Therefore they task their business bankers with finding these larger more established borrowers. This has left a large hole for companies in the $5 – $15M Annual Sales range trying to find lenders who will service their needs.
In addition, smaller banks are still scared about adding any red ink to their balance sheet as the result of a failed loan. Most small businesses have some sort of story related to why they need outside capital, and that story usually forces lenders to think outside the box – which they don’t like to do, especially during the current economic situation.
Sean is correct, small businesses are actively reaching out to alternative sources of capital for their growth needs as a way to build a bridge to qualifying for conventional lending.
This seems to be what a lot of small businesses are saying unfortunately. Banks are only willing to lend to businesses that have stability and further assets to fall back on meaning that smaller businesses are looking elsewhere to fund their business.
Back in 2011 the United States Census Bureau reported that there are 28 million small businesses in the US, with 22 million reported as being self-employed with no employees. Keeping that in mind, approximately 543,000 new business get started monthly with even more employer owned businesses shutting down than those that start up each month. Lenders recognize that half of all small businesses fail within the first five years and scrutinize business owners; not only do they dissect the business financials, they question the owners’ qualifications and their ability to operate the business and recoup their investment. At the end of the day Banks are in the business to make money and it takes as much energy and time on lending $10,000 as it does $100,000.