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How Small Businesses Are Still Struggling to Obtain Bank Loans

  • Financing|
Published: 03/15/2018

Impacts from the 2008 financial crash are still being felt today, and they’re hitting small businesses especially hard, according to a brand new report from the Small Business Administration’s Office of Advocacy. The 2008 market crash did significant damage to the global economy–a Government Accountability Office report estimated that it cost more than $22 trillion to the U.S. economy alone. While financial indicators in many sectors have slowly but surely recovered nearly a decade after the crash, the SBA’s recent report breaks down how small businesses have continued to be affected.

The Small Business’s Plight

Small businesses are vitally important to our economy and our culture. A recent Gallup poll found that Americans tend to have much higher confidence in small businesses than large corporations, citing factors such as the dedication and accountability of small business entrepreneurs, the value of the American dream, and creation of local jobs.

The Huffington Post recently summarized a few of the many ways small businesses contribute vitally to the American economy, including driving innovation of unknown ideas (Apple, after all, was a small business when it revolutionized the computer industry), giving back to local economies, and providing 60-80 percent of all US jobs and 44 percent of the total U.S. payroll.

But despite their importance, small businesses have always had a harder time finding business loans and credit than large businesses. The processing costs for banks to handle large companies’ loan applications versus small companies’ loan applications are generally similar, which means banks gravitate towards the perceived higher ROI of mega-customers. Banks also require collateral, which is easy enough to provide for large companies but can be incredibly difficult for family-run businesses.

Many beginning entrepreneurs must risk substantial personal assets, such as their homes. Because banks look to individual founders’ credit histories, personal credit issues can sink a loan application. And there’s an experience conundrum as well–banks prefer providing loans to businesses with proven track records, but it’s hard to develop a track record for your business when you can’t get the financing to launch it!

Fewer and Fewer Loans

The SBA’s report, titled “How Did Bank Lending to Small Business in the United States Fare After the Financial Crisis,” shows that small business loans were disproportionately affected by the 2008 market crash. The report builds on an earlier 2012 study, which found that “the decline in bank lending was far more severe to small businesses than to larger firms.”

Its 2018 follow-up determines that while both small and large businesses enjoyed high lending rates before the crash, the lending decline was more significant for small business loans than large business loans during and after the crisis. Small business loan originations dropped more than 50 percent during the crash, and nine years later are still 40 percent lower than pre-crisis levels. The report ultimately concludes that “there has been little in the way of a recovery in the small business loan market, but a somewhat more robust recovery in the market for total business loans.”

While things have gotten substantially better for larger businesses, things are still tough for smaller ones.

Bigger Banks

Banks themselves were severely affected by the 2008 crisis, and small banks were hit particularly hard. The Institute for Local Self-Reliance reports that one in four community banks vanished between 2008 and 2015. The new SBA report illustrates how the closure of small banks has also affected small businesses. During the crisis, loan origination declined much more dramatically at large banks than at small banks.

Post-crisis, while total business lending grew more quickly at larger banks, small business lending grew much faster at smaller banks. Smaller banks have been essential to providing lending recovery to small businesses post-2008, but small businesses increasingly have only large banks to turn to. This could spell real trouble. D Magazinerecently examined Northern Texas banking and concluded that “the ongoing consolidation of the market into fewer hands combined with the lack of new entrants raises the possibility of a credit crunch for small businesses in these parts down the road.”

Reasons for Optimism

Given the difficulties small businesses continue to face in obtaining essential bank loans, you’d think that a pessimistic mood would be settling over the small business world. But you’d be wrong: PYMNTS.com reports that 31 percent of small businesses feel like they’re in a better financial position than they were a year ago, and 71 percent say their financial situation is “somewhat good” or better.

Where does this optimism come from? No doubt a large portion comes from factors not directly related to financing, but finding credit also plays an important role in day-to-day small business management. Part of the optimism may stem simply from increased attention to the problem, and the SBA’s report presents several recommendations for increasing small business access to bank loans, such as increasing lending power among credit unions.

Small businesses might also be feeling cheerful because they increasingly have access to alternative arrangements for finding capital, such as peer-to-peer lending, crowdfunding, and even marketplace lending platforms such as Currency. These platforms allow lower-friction loans, often on terms that are much more appropriate for small businesses than bank loans.

If you have any additional questions about obtaining loans, please contact Currency for support.

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