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Bankers See Small Business Lending as Next Profit Center

Bankers See Small Business Lending as Next Profit Center

Since previously reliable revenue streams are drying up for banks, bankers have their sites set on profiting from small business loans. Alternative lenders (including asset base lending and accounts receivable lenders among others) still have the highest approval rates for lending to small business, but bank rates are rising.  The problem is that banks still have a very tight credit approval process. Small businesses that have struggled in the past or grown so rapidly that liquidity has been a problem, often can’t show a clean enough balance sheet to qualify for a traditional bank loan. If a small business does not have a squeaky clean credit history, an alternative source for commercial finance continues to be a most viable solution.


November 25 2012, by Gregory Bresiger

Bankers now have plenty of time and money for the person who owns that small store on the corner. That’s because the bankers see small business lending as their next profit center, since investment banking and the mortgage-backed securities deals that blew up in 2008 are no longer viable revenue streams, according to several banking experts.

Rohit Arora, CEO of the monthly Biz2Credit Small Business Lending Index, says new regulations that restrict how much banks can charge individuals for loans, combined with the housing disasters of four years ago, mean banks view mom-and-pop business as the road to fat profits. “For the first time in years, banks are turning away from investment banking and mortgages and looking to loan money to small business,” according to Arora. He says banks are telling him that this is the kind of business that has become more desirable.

Arora’s lending index has passed the 50 percent loan-approval rate since the recession. This is the “highest approval rate by small banks with less than $10 billion since the lending index began. In addition, big-banking lending approvals increased for the second consecutive month,” according to the index. Arora believes that banks are turning away from Wall Street and toward Main Street in part because of the Dodd-Frank regulations. “The Dodd-Frank law covers retail relationships, the relationships that banks have with consumers. It doesn’t cover the small business loans,” Arora notes.

Both small and big banks are seeing the small-business loan approval rates rising, the index showed. The alternative lenders have the highest approval rates. (Alternative lenders include accounts receivable financers, merchant cash lenders and micro lenders, among others.)

Banks, adds an industry observer, have excess capital to lend. “This is a great time for viable small businesses that are looking to borrow money,” says Bob Seiwert, senior vice president of the Center for Commercial Lending and Business Banking for American Bankers Association (ABA). Seiwert defines small businesses as those with between $100,000 and $10 million of annual revenues.

The Dodd-Frank rules, he noted, put a limit on debit-card fees and overdraft charges. Banks, he adds, are being squeezed. There are fewer investment-banking opportunities and it is tougher to earn big profits on consumer credit services. So banks have plenty of money but fewer moneymaking opportunities, especially with individual customers. The situation is difficult for many big banks today, industry observers say. They can’t make money on individuals with $100,000 or less in a checking or savings account because it is very expensive to maintain these individual accounts. That’s what Todd Maclin, chief executive officer of consumer and business banking for JPMorgan, recently told the Financial Times.  Separately, JPMorgan has just announced that it is launching a new media campaign that highlights the achievements of small businesses that use Ink, which is the Chase business-card portfolio.

“Small-business owners are amazing individuals who can learn on the go, invent on the fly and figure out how to be successful,” according to Richard Quigley, president of Ink from Chase.