Small-Business Banking
As the credit freeze and the economic recession deepen, major lenders are making it harder for small businesses to secure loans even though they obtained money from the federal government last year through the Troubled Assets Relief Program to do precisely that. Moreover, they are appealing for help in sharing the risk involved in extending credit to small businesses.
“Because of the inherent risk, however, banks need help in sharing the risk posed by making intermediate or long-term capital loans to small businesses,” argues the American Bankers Association, an advocacy group for the banking industry.
A survey by the U.S. Federal Reserve bank in November showed that 75 percent of lenders were tightening credit requirements for small businesses and 90 percent were raising the rates they charged on loans and credit lines. The news was not good from the U.S. Small Business Administration either. The agency’s lending through its 7(a) loan program, the government’s premier small-business loan program for startup and growing small businesses that lack sufficient access to capital, was down 55 percent from the previous year, and lending through its Certified Development Company (CDC) 504 loan program, created to help small and medium-sized businessowners acquire commercial property, was down 36 percent.
In the first quarter of its 2009 fiscal year, which ended Dec. 31, the SBA’s 7(a) program backed 8,996 loans, down 57 percent from the 20,859 loans the SBA backed in the first quarter of 2008, and 62 percent from 2007’s first-quarter total. The total dollar value of loans processed by the SBA also fell to $1.94 billion, down 40 percent from 2007’s $3.24 billion.
The 7(a) loan program takes its name from section 7(a) of the Small Business Act, which authorizes the agency to provide business loans to American small businesses. Under this particular program, the SBA encourages commercial banks to lend to small businesses by providing a guarantee on a portion of their loans. Loans under 7(a) can be used for working capital, machinery and equipment, furniture and fixtures, land and building, leasehold improvements and debt refinancing. The 504 program complements the 7(a) program by providing small businesses with the necessary long-term, fixed-rate financing to acquire real estate or equipment for expansion or modernization.
According to the National Federation of Independent Business, small-business owners have just over a trillion dollars outstanding in debt from financial institutions, most of it acquired through loans and lines of credit from banks and other depository institutions, loans from finance companies, and credit cards from credit-card issuers, typically banks. Small-business loans are defined as business loans under $1 million; micro-business loans are those under $100,000; loans in the $100,000 — $1 million category are referred to as larger small-business loans.
“Access to credit is essential for small-business survival and the banking system is the most important institutional supplier of credit to small firms in the United States,” says Chad Moutray, chief economist and director of economic research at the SBA’s Office of Advocacy.
Last June, the Office of Advocacy published a report titled “Small Business and Micro Business Lending in the United States, for Data Years 2006 –2007,” which shows developments in the small- and micro-business lending activities of institutional lenders for the period just before the credit crisis hit.
“The knowledge of how lending institutions are meeting small-firm credit needs and which lenders are investing in small businesses is critical to the health and growth of small businesses,” the Office of Advocacy said in releasing the report. “Such information not only helps small businesses save precious time in shopping efficiently for credit; it also provides lending institutions with information on the demand for and supply of small-business credit, and helps them learn about the competition in the markets in which they participate.”
According to the report, the pace of borrowing and lending in the small-business loan markets in 2006 to 2007 was much stronger than in the previous year for both micro-business loans and those in the larger small-business category. But a study by J.D. Power and Associates, the global marketing information firm that conducts surveys on customer satisfaction, shows the percentage of small- business customers acquiring unsecured loans decreased slightly to 40 percent in 2008, down from 44 percent in 2007.
The big banks insist that they would like to do more for small businesses. “Banks already play a vital role in helping small businesses gain access to capital. We would like to do more,” the American Bankers Association says in a position paper on small business access to capital.
Many small-business owners indicate that one major obstacle to entry or expansion of their small business is the availability of sufficient intermediate and long-term capital to support their working capital and fixed-assets requirements, the association says. Indeed, banks continue to experience a strong demand for intermediate and long-term loans from their small-business customers and prospects. But help should come from the SBA in satisfying that demand, they contend.
“The SBA is an important partner in providing loan-guarantee programs needed by banks to provide the appropriate intermediate and long-term capital to their small-business customers,” the association says. “The SBA’s 7(a) and 504 loan programs are critical tools in helping banks provide this funding to their small-business customers and prospects. Without these loan-guarantee programs many small businesses would not be able to obtain the necessary capital to establish or grow their businesses.”
Because banks are counting on the SBA to help them share the risk of lending to small businesses, the association pledged to work “both indepen-dently and jointly with other trade associations and rule-making bodies to assure the ongoing availability, efficiency and viability of the SBA’s loan- guarantee programs.”
Meanwhile, community banks (banks with generally less than $10 billion in assets) say the number of loans and credit lines they extend to small businesses has increased. According to the Independent Community Bankers of America, community banks make 20 percent of all small-business loans, even though they represent only about 12 percent of all bank assets and about 50 percent of all small-business loans under $100,000.
In its Jan. 27 editions, Business-Week quotes Aite Group, a Boston banking consultancy, as saying that for the past two years, small-business lending among community banks has grown at a faster rate than from larger institutions. “Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks,” BusinessWeek quotes Christine Barry, Aite’s research director, as saying.
“They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers.”
