Many small businesses say they are finding it difficult, or impossible, to get a loan from a bank. Recent data supports their claim and seems to indicate that the screws are beginning to tighten again. Figures show that big bank (those with assets over $10billion) lending to small business has continued to drop over the last several months. At the same time, other lenders – especially those offering alternative commercial financing , are rushing in to fill the gap.Studies showing a recent decrease in bank lending also show that approvals by small banks have dropped. Representatives of several big banks say they’ve increased their commitment to small business lending and figures do bear this out for a few. But, are there more strings attached? Are they offering the amount needed? With the increased exposure to risk in a bad economy and tighter regulations, many observers do not expect any significant increase in small business loans in the next few years. The jury is still out on whether Basel III regulations will lead to more small business lending, or less. In the meantime, those looking for a loan may find themselves rejected. Alternative commercial lenders are often an option for small business owners looking for working capital. There are various types of asset based loans, which are based on collateral and not a balance sheet, making it much easier to get approval and providing more options for those seeing capital to grow or stay in business.
Late last year, Peter Kocher decided it was time to open a second store. The founder of Ride Brooklyn, which sells, repairs and rents bicycles, had started his first shop in 2009 and, with healthy sales and profit growth, figured he could expand. But he needed to take out a $350,000 loan.
So Mr. Kocher tried his bank, JPMorgan Chase. There, he was offered a $75,000 small business loan. Not enough.
Next, his accountant connected him to a contact in another unit of the bank. Mr. Kocher then was offered $175,000, plus a $50,000 line of credit. Trouble was, as part of the deal he had to close out an existing $100,000 credit line at another bank, money he needed to get him through the slow winter months.
“It just wasn’t an option,” Mr. Kocher said.
Ultimately, through Grow America Fund, a community-development lender financed largely by banks, Mr. Kocher, whose company had $1.6 million in revenue last year, was able to get business funding for $345,000 and keep his existing line of credit. He expects to open a second shop soon.
Mr. Kocher is by no means the only small business owner finding it difficult—or, in many cases, impossible—to get a business loan from a big bank. And, despite recent data indicating lending had loosened, there are signs the screws are beginning to tighten again.
At banks with more than $10 billion in assets, 10.2% of commercial loan applications from small businesses were approved in May, down from 10.6% in April—and from 11.7% in January and February, according to surveys of small business customers of Biz2Credit, a Manhattan-based company that matches small businesses with lenders.
Although regional data aren’t available, according to Rohit Arora, Biz2Credit’s CEO, the trend is the same for the New York area. “Lending by big banks has become considerably more sluggish,” he said, noting that at the same time, other lenders, especially alternative commercial lenders, are rushing in to fill the gap.
Is this a harbinger of things to come? Is reduced lending by big banks—approval levels should be on the order of 30% to 38%, according to Mr. Arora—a relatively fleeting phenomenon or the new normal? And will commercial financing in New York continue to follow the pattern of the rest of the country?
The answer: No one really knows yet.
To be sure, studies showing a recent decrease in commercial financing by banks doesn’t just involve the big guys. According to research by John Paglia of Pepperdine University, 31.8% of small businesses successfully got bank loans from institutions of any size in April, compared with 48.5% back in October. And Biz2Credit shows that approvals by small banks dropped to 45.5% in May from 47.5% in January.
Representatives of several big banks also say they’ve increased their commitment to small business lending. Citibank plans to increase its lending to small business from its $7 billion goal in 2011, which it exceeded, to $8 billion this year. JPMorgan Chase made nearly 60,000 new small business loans worth more than $2.2 billion in 2012 and is the highest SBA lender in dollar amount and number of loans, a spokesperson said. As for Bank of America, its “small business loan approval rates have been consistent throughout the first four months of 2012 and continue to be higher than last year’s numbers,” a spokesperson said.
Still, some observers don’t expect to see a significant uptick in lending for at least another two to three years. “For the foreseeable future, we’ll see a dip in lending,” predicted Linda Allen, professor of economics and finance at Baruch College’s Zicklin School of Business. Her research shows that when banks’ balance sheets include a high exposure to risk, as they do now, it tends to foreshadow an economic slowdown. She has also found that big banks have billions of dollars of unpaid mortgages on their books. Her forecast: “They’re going to reduce their lending,” she said, “and small businesses will be the first to go.”
On the other hand, according to Mr. Arora, pressures from regulatory changes are likely to force large banks to boost their small business lending over the next two years or so. He points to Basel III, global regulatory standards passed in 2011 that increase requirements for how much the largest institutions have to hold in liquid assets. To fuel those larger asset bases, banks will have to make more loans.
In addition, the so-called Volcker Rule, a section in the Dodd-Frank bill that forbids banks from using money from insured deposits to finance proprietary trading, will also force them to step up lending to make money. Commercial loan approval rates could double over the next two years.
For Lawrence White, the Robert Kavesh professor of economics at NYU’s Stern School of Business, the central issue is the state of the economy, which he sees strengthening over the next two years. And with that improvement, banks’ willingness to lend to small business will also increase, both nationally and in New York City.
“Usually the New York economy lags the rest of the country in recovering from a recession, but that’s not going on this time,” he said. “What happens in New York will mirror what happens in the rest of the country.”
In the meantime, however, the message is clear: Small business owners like Mr. Kocher may continue to find it difficult to borrow from big banks for quite a while to come.