Why Has Bank Lending To Small Businesses Been Declining For The Past 15 Years?

Forget about what the media has been saying. If it feels like bank lending to small businesses has been on a decline over the last few years, it’s because it is really happening. Surprisingly though, this decline extends way beyond the past few years. According to data collected by the FDIC, small loans (those under $1 million) made to small companies have been a decreasing fraction of all bank loans for the past 15 years.

It’s an interesting find considering that the media has been quick to point fingers at the recent recession as the cause behind the sluggish small business lending rates. But if the recession isn’t to blame, then what is?

The answer is probably a few things. Scott Shane, over at Small Business Trends offers three possible reasons:

  1. Many big banks have gotten into the nasty habit of “securitizing” their loans, which basically means they’ve been making gobs of money by bundling loan products into bonds that can then be sold to third parties. Since small business loans tend to be unattractive as securitized products go, the banks have opted to reduce the number of these loans in favor or more securitizing-friendly loans. 
  1. A lot of small business lending happens at smaller, community focused banks. The problem is that over the past several years there’s been an overall consolidation of the banking industry and a lot of smaller banks have either closed down or were merged into bigger banks. With fewer small banks available to lend to small companies, the lending rate naturally went down.
  1. Lastly, the banking industry has become more openly interested in bragging rights and a bloated bottom line then in the customers their supposedly serving. Part of the shift in lending may be due to the fact that banks are simply focusing on their most profitable loans- you’ve got it, those over $1 million. These loans loans tend to be more profitable because they can rake in the revenues faster. 

These reasons definitely seem plausible, but there may be a few more as well:

  • It could be that for a variety of reasons small businesses are just seeking fewer bank loans. There has been a burgeoning of sorts of outsourcing and strategic partnerships over the past few years- both of which can effectively reduce operating costs. Smaller businesses have also been having a harder time trying to make a profit- especially over the last few years as costs in employment and healthcare have skyrocketed. Thus, they may be wary about taking on additional debt.

 

  • Over the past decade, alternative, non-bank financing companies, such as cash advance companies and accounts receivables factors, have stepped into the small business loan space. A fair about of small business lending is now being done by these alternative private lenders as well as credit unions, private banks, leasing companies, and private investors doing debt financing. Typically, these financing options are more flexible and easier to attain than your run of the mill small business bank loan so small businesses may simply be bringing their business elsewhere.
  • Finally, many more businesses may just be unable to meet the banks’ lending requirements and are thus not being accepted for financing. This lack of attractiveness may not just be a result of lower sales or poor credit (though they are probably playing a part). It could also be due in part to a broader shift towards intangible assets rather then tangible ones, as well as businesses sporting more flexible (i.e. less stable and known) setups- a situation that makes it harder to assess the risk of extending financing.

Whatever the case, the trend towards fewer bank loans for small businesses is an undeniable reality, and it’s something to consider if you plan on heading to the bank in search of financing for your small company.

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