Small business owners are all too aware of the difficulties the recession brought with regards to financing. Bank lending was cut sharply, which made investing back into small businesses to spur growth difficult. In the years since, although many small businesses have managed to recover, lending rates have slumped behind, according to economists Anne Marie Wiersch and Scott Shane. As a result, demand for bank loans is shrinking as business owners find new ways to forge the nation’s economic recovery.
How much did lending decrease during the Great Recession? Although 100,000 small businesses were added between 2007 and 2012, the number of loans dropped by 344,000, according to Wiersch and Shane. Furthermore, during quarter four 2012, the value of commercial and industrial loans of less than $1 million was 78.4 percent of what it was in 2007 when adjusted for inflation.
Two arguments can explain the decrease – some attribute it to tighter lending practices from banks, while others say demand for getting a small business loan has decreased. In reality, both are likely causes, which, when acting in concert, explain the lending climate seen today.
Favoring big business
During the recession, banks began to view small businesses as more risky borrowers, according to Wiersch and Shane. Instead, many shifted their focus to big businesses. Smaller loan applications were not considered worthwhile, leading many to be rejected.
After 2008, the majority of banks increased lending standards for both small and large businesses, according to the Office of the Comptroller Survey of Credit Underwriting Practices. However, during 2011, large business lending experienced a net loosening when more standards were being lowered than raised. Small business loan standards, on the other hand, remained tight. What the results suggest is that while bank lending may have bounced back, focus had shifted away from small businesses.
The same could be said for federal programs aimed to help small businesses. In 2012, the average loan backed by the U.S. Small Business Administration was $337,730, which is more than what most small businesses generally ask for, according to The Huffington Post.
Alternative financing comes out ahead
The sharp drop in bank lending appears at odds with the growth of small businesses since the recession. The surge of alternative lenders, however, is a key factor in helping small businesses recover, according to Forbes. As banks and credit unions began to focus on ‘A-credit’ clients and larger businesses, a void was left in the market for small businesses. Subsequently, alternative lenders filled the gap, discovering innovative ways to provide financing.
For example, the practice of underwriting in-person by committees causes banks to take 30 to 60 days for approvals and funding, according to Forbes. Developing technology for underwriting, on the other hand, has allowed alternative lenders to provide loans in 24 to 48 hours.
The advantages of alternative lenders can help explain why demand for financing from banks has decreased. Small business owners are more involved than ever with their work, meaning the hefty paperwork and long wait times for traditional lenders are no longer possible. National Funding, on the other hand, streamlines the process, allowing small business to reinvest in no time.