There’s been a lot of public discussion about the state of small business funding, what’s available, and how the times, they are ‘a changing. The U.S. economy is growing, and small businesses are a large part of that. They’ve been the engines of job creation for the past few years as we’ve come out of the Recession. And, more and more people are eschewing chains and multinationals, choosing instead to shop local and shop small.
So, things are getting better for businesses in the U.S., but the numbers show — and the small business owners we talk to all tell us — that access to capital is still a challenge. Traditional small business lending from banks tanked during and after the Great recession. And while some of that funding is starting to come back, it’s not at pre-recession levels, and it’s nowhere near what small businesses need.
So what does that mean? In a nutshell: non-traditional lenders are filling the gap. Community Development Financial Institutions (CDFIs, like PCV), crowdfunding platforms, community banks and credit unions, online lenders. The list goes on.
The Banking Industry Is Less Focused On Small Business
Banks are moving upstream to bigger and potentially more lucrative business lending. That’s not a market correction, it’s a choice. According to Forbes, “…small business loans on the balance sheets of banks are down about 20 percent since the financial crisis, while loans to larger businesses have risen by about 4 percent over the same period.” Read more here.
Ranking Banks For Small Business Lending
Just because lending to small business owners is down at major banks, doesn’t mean all banks are the same. Banks have a lot at stake when it comes to small businesses: more than half of Americans either own or work for a small company, and they create about two out of every three new jobs in the U.S., according to the U.S. Small Business Administration. Some banks have more of a vested interest in these small businesses than others. This article from Sage Works breaks down the numbers.
Big Banks Aside: One in Four Local Banks Has Vanished Since 2008
Over the last seven years, one of every four community banks has disappeared. That’s 1,971 fewer small, local financial institutions today than before the Recession. Some failed outright, with the FDIC stepping in to pay their depositors. But most of the rest were acquired and absorbed into bigger banks. Why does that matter? For the last 15 years, compared to big banks, community banks and credit unions have had lower loss rates across nearly every category of commercial loan — and their share of small business loans is almost that of large and mega banks combined. Read more here.
Filling The Gap: Online Lending Takes Off With Small Business Owners
There are two big factors driving small businesses to find new sources of funding. The disappearance of community banks, and the fact that loans under $250,000 are what most small businesses want. Many banks make loans today much the way they did 50 years ago: relying on expensive personal underwriting and a mountain of paperwork. That makes small dollar loans less economical, even if it’s what the market needs.
So who’s stepping in to fill that gap? In the past five years, it’s been online lenders. In a recent Federal Reserve survey 18% of small business owners reported seeking capital online. Breakaway Funding in Sausalito recently debuted a lending platform to provide financing for small businesses that don’t qualify for a traditional bank loan, at least not yet. Others include San Francisco-based CircleUp, Atlanta-based Kabbage, New York-based Raiseworks, San Diego-based Dealstruck and New York-based OnDeck. Our partner Kiva also started making microloans to small businesses last year. Read more at Fortune.
It’s Not Just Online Lenders: PayPal & Square Strike Gold Financing Small Businesses
The Bay Area may be awash in venture capital aiming to finance the next big thing in technology. But that’s little help for the owners of even profitable small businesses seeking capital to grow. While a lot of new players, like the ones mentioned above, are starting to carve out space, bigger financial companies in the tech space are also seeing opportunity. PayPal said this month that it’s provided $500 million in business loans to more than 40,000 small and mid-size businesses. At the same time, Square Capital has said it’s advanced well over $100 million to more than 20,000 businesses. Read more.
Are Predatory Business Loans the Next Credit Crisis?
There’s another downside to the drop in small business loans among big banks: desperation. When a small business owner needs an influx of cash to keep their company growing — but their bank rejects them because the amount is too small — more and more entrepreneurs are turning to unregulated, high-interest lenders. While many online lenders are legitimate and filling a need, there are others out there who are taking advantage of the tight lending market. Read more — and support changes in public policy to keep small business lending honest.
It’s important to remember – in this changing landscape between traditional banks and online lending – that there are also other resources out there, like CDFIs. PCV is a CDFI, and in a way we’re like a middle ground between a bank and an online lender, who can fund your small business’ needs without getting you in over your head. We also provide guidance throughout the loan process and while deploying capital.
Has your small business struggled to find working capital recently? We’d love to hear your story.