I read an article by Scott Shane published last week in Small Business Trends on the subject “Are Banks Losing Interest in Small Business?” I almost skipped reading the article; assuming that it was yet another summary of lending statistics from the past month released by Thomson Reuters/Paynet or Biz2Credit. While I appreciate the information that those groups (and others like them) give us, the statistics are increasingly contradictory. Approval rates at big banks for small business loans seem to be improving while community banks and credit unions are staying about the same or even declining.
Mr. Shane presents an argument based on data that I think is far more telling than conclusions based on monthly approval rates. He compiled data released by the FDIC over the past 17 years on the share of small loans (less than $1 million) that banks have made to businesses. The data tells us that small loans have been “a decreasing fraction of all bank loans for the past decade and a half.”
So, what is the significance of this information? It tells us that the decline in lending by banks to small business has been a trend for far longer than the past five years. It also tells us that banks are becoming increasingly more interested in lending large amounts of money rather than small loans that are primarily made to small business owners.
As Mr. Shane points out in his article, the potential reasons for this trend are numerous. One explanation that stood out is that decreased lending is the result of the increasing consolidation of the banking industry over the past 15 years. As big banks continue to absorb the smaller banks that have historically lent to small businesses, there are far fewer banks remaining that make small loans a priority. The consolidation trend is likely to continue with the passing of new Federal regulations that are expected put additional financial strain on small banks.
Though Mr. Shane did not explicitly say this in his article, I think the implications of this data are obvious. First, we’re probably not going to see a full small business lending recovery by the banking industry – at least not the kind the media is waiting for. Second, it appears the big banks that are gobbling up smaller banks aren’t interested in making small business lending a priority. Third, we’re going to have to permanently shift the way we think about small business lending.
The good news? There is already a solution to the problem. Alternative financing companies are eager to lend to small businesses. The industry is growing rapidly thanks to advancing technology, creative business models, and small business owners looking for flexible financing solutions. Invoice financing, purchase order financing, merchant cash advances, factoring, crowdfunding, and peer-to-peer lending are just a few of the types of small business financing that are out there. As more companies begin to offer alternative funding solutions, the price of capital is being driven down; to the benefit of the small business owner. It’s time we stopped thinking of these companies as the second best option for funding. Alternative lenders are here to stay – and that’s not a bad thing for small business owners.