As small business growth is essential to an expanded workforce and a healthy economy, entrepreneurs who need to borrow funds may want to consider pursuing an alternative lender to secure a small business loan as banks continue to underserve smaller firm clients.
Smaller banks tightening lending to business owners
According to Bloomberg, U.S. community banks are using stricter standards when it comes to lending money to small business owners and this is having a negative impact on hiring growth. Data from the ADP Research Institute recently showed U.S. small business owners only increased their labor force by 3.8 percent between February 2010 and April 2013, whereas larger companies were able to increase employment opportunities by 8.6 percent during the same time period.
The reason for a slower hiring rate among small businesses is likely due to the difficulties smaller enterprises encounter when getting approved for funding, as lack of finances means employers cannot afford to expand their payroll or train new workers.
According to a Federal Reserve Bank of Atlanta small business survey from third quarter 2012, 41 percent of small business owners who have been in operation for less than six years were not able to acquire funding for their enterprise. In addition, 36 percent were able to secure some financing, but did not get the amount of finances needed.
Community banks struggling after recession
One of the reasons banks are being more cautious when it comes to lending are low interest rates, Bloomberg reported. Smaller profits from interest make it more difficult for banks to rebuild equity, and thus, rethink their lending options.
Many smaller banks have been struggling since the economic recession in 2008. According to the FDIC, 11 percent of lending institutions with $100 million to $1 billion in assets did not make a substantial profit during fourth quarter 2012.
The slow growth is having the most detrimental impact on small business owners, as tighter lending standards result in higher rates of rejection for newer entrepreneurs.
“If community banks are on shaky ground and unable to extend credit, the small businesses won’t be able to expand their operations and payrolls,” said Mark Zandi, the chief economist at Moody’s Analytics, told Bloomberg.
Although small business owners may want to hire employees, a lower rate of loan approvals prevents many from doing so, which contributes to a stagnant economy.
As community banks exhibit more caution when it comes to lending, owners who would benefit from a working capital or small business loan can contact an alternative lender like National Funding to learn about the financial options that will provide them with the foundation needed to build their business and expand their workforce.