The State of Small Business Lending
The State of Small Business Lending
As we head into 2013, the small business lending scene is still convoluted at best. Small to mid size businesses continue to be frustrated by the lack of access to capital from banks for those with a less than squeaky clean balance sheet – which is the majority. Community banks and alternative commercial lenders continues to fill the void, providing much needed liquidity for existing small business and start ups. Alternative commercial financing options can be much faster and more creative than traditional lending sources and pricing is becoming more competitive as the industry grows.
In part, my perspective comes from reading various reports about the state of small-business lending. These reports, however, don’t tell the whole story. For example, the Small Business Administration releases numbers that apply only to S.B.A.-backed loans. And the data that comes from the Federal Deposit Insurance Corporation about bank lending activity includes credit card loans. Meanwhile, the alternative lenders don’t release any aggregate numbers at all.
This makes it hard to get a clear picture of what’s happening. Obviously, no one person or company has a handle on all of the credit markets, but as a loan broker, I speak every day to business owners who are trying to borrow money and bankers who say they want to lend it. Here is what I see happening on the front lines.
If you’re trying to start a business today, you can almost forget about going to a bank for financing. This situation hasn’t changed much in the past year, and we don’t see it changing any time soon — with a few exceptions. If you are opening a franchise outlet that is on the approved S.B.A. list or if you have solid personal collateral outside of your new business, you’ve got a shot.
In 2012, frustrations about the difficulties involved in financing start-ups resulted in a lot of political capital being focused on one possible solution, crowdfunding. Unfortunately, crowdfunding hasn’t taken off yet, and I don’t think it will in 2013. It will take time to iron out the kinks and figure out how to make it work — how to strike the right balance between helping companies and protecting investors.
On a happier note, things have definitely gotten better for companies that are clearly creditworthy. In 2012, if you owned an existing business and you had collateral, cash flow and good credit scores, it was a good time to borrow money at low rates. And I think that will continue for some time. Banks are now hunting eagerly for these borrowers.
The problem is that there are not nearly enough of them. And that’s why a group of alternative lenders — including factors and merchant-cash advance lenders — are lined up and ready to supply money to most of the rest of us. The challenge is that these borrowers face high rates that make it tough to grow and expand as much as they would like.
The alternative financing industry is growing rapidly and, I believe, will continue to grow in 2013. These lenders are extremely entrepreneurial and are leaving the banks behind with their speed and use of technology. Many are backed by premier investment banks and Silicon Valley venture capital powerhouses — investors who understand that entrepreneurs and small-business owners are throwing up their hands in frustration over how long it can take to get a loan from a bank, especially if the loan is backed by the S.B.A. More and more businesses are willing to pay the price of the alternative lenders just to be able to get their capital and move on.
There are some indications that the price of alternative lending may be coming down a bit as the industry gets more competitive. I expect this to continue in 2013. That said, there is still a wide discrepancy in pricing between bank loans and alternative loans.
Despite the growth of alternative financing, we have heard little from Washington about the challenges small-business owners face when borrowing money. For reasons I still don’t understand, access to capital for small-businesses was pretty much a non-issue in last year’s presidential campaign. When we do hear from Washington in 2013, I expect the conversation will be mostly about the S.B.A., which is fine as far as it goes. I am all for the S.B.A., but as I have written previously, it represents a tiny piece of the overall puzzle – and should be thought of as such.
The largest banks continue to tout their small-business lending records, but the numbers they provide to back this up are less than convincing. We regularly speak with small-business development officers at these banks who are ready to throw up their hands in frustration at their inability to get their clients the help they need. My expectation is that this will not change much in 2013, as the bigger banks simply aren’t equipped to handle small-business lending and Washington puts little pressure on them to figure it out. Community banks, meanwhile, continue to be friends of small businesses, and relationship banking continues to be critical in completing loans.
I hope that in 2013 we will find ways to break the gridlock. While the economists say the recession is over, many of us in the small-business community are still reeling from the aftershocks. My hope is that in 2013 we will find new ways to get lower priced capital into the hands of more small-business owners and entrepreneurs.