Access or demand? What’s really stopping Main Street from recovering


Last week, Andy Peters of American Banker wrote that Regional Bankers predict weak loan demand for the rest of the year. Although that may be true in some segments, that’s not what we’re seeing for Main Street. In fact, I’m not convinced demand has ever really been the problem—the problem has been access to capital.

After the financial meltdown of 2008, banks all across the country clamped down on their credit requirements. Additionally, many banks moved upstream to chase bigger fish, creating a capital access crisis for the small business you and I identify with on Main Street. Not long ago, the National Small Business Association released a report that, among other things, suggests although bigger small businesses are seeing credit requirements loosen up a bit, the smallest small businesses are still struggling to borrow the capital they need to fuel growth and fund working capital.

This is particularly troubling when we consider that Main Street is the biggest single job creator in our country. “Small business plays a huge roll in economic growth, specifically when it comes to hiring. Unfortunately, just 18 percent [of the NSBA survey respondents] report increasing their employee size, while 26 percent report decreases in employee size, resulting in negative net employee growth.”

You don’t have to look very hard to figure out one outcome of the Great Recession is the American workforce has become more productive, so much so that profits are rising, but employers aren’t hiring. Part of the hiring slump might be the result of the productivity gains those lucky enough to have had a job over the last few years have been able to make, but I’m not convinced that tells the whole story. I am convinced that less capital for Main Street equates to fewer jobs. And, at Lendio, we are seeing a steady increase in demand from Main Street business owners looking for the financing they need to expand and hire people. Job creation and available capital are attached at the hip—one feeds the other.

Last month, the Federal Reserve Bank of Cleveland released some findings that might shed some light on what’s happening. They even share one big surprise.

1. Demand is down: “Bankers say that the main reason small business lending is lower than before the Great Recession is that demand has fallen. Small business owners, they argue, aren’t expanding, depressing the amount that the small business sector needs to borrow.”

Small businesses were hit pretty hard during the recession and the report authors suggest, “typical self-employed household income saw a 17 percent drop in real earnings [between 2007 and 2010].” What’s more, the pounding small business owners have taken in the last few years has probably caused a drop in confidence among business owners’ willingness to stick their neck on the line with the bank. And the next two reasons for the decline probably shed the most light on why they might lack that confidence.

2. Small businesses are less creditworthy than they used to be:“Fewer small business owners have the cash flow, credit scores or collateral lenders are looking for. According to the latest Wells Fargo/Gallup Small Business Index, 65 percent of small business owners said their cash flow was “good” in the second quarter of 2007, compared to only 48 percent in the second quarter of 2013.”

Credit scores are a critical metric banks look at when evaluating a potential small business loan, and the recession has taken its toll. I understand that sometimes a small business owner needs to rob Peter to pay Paul and keep the doors open, but it comes with a cost. The report argues, “The Federal Reserve’s 2003 Survey of Small Business Finances indicated that the average PAYDEX score of those surveyed was 53.4. By contrast, the 2011 NFIB Annual Small Business Finance Survey indicated that the average small company surveyed had a PAYDEX score of 44.7. In addition, payment delinquency trends point to a decline in business credit scores.”

3. Lending standards have tightened: “Loan standards are now stricter than before the Great Recession. In June 2012, the Federal Reserve Board of Governors asked loan officers to describe their current loan standards ‘using the range between the tightest and easiest that lending standards at your bank have been between 2005 and present.’ For non-syndicated loans to small firms (annual sales of less than $50 million), 39.3 percent said their standards are currently ‘tighter than the midpoint of the range,’ while only 23 percent said they are ‘easier than the midpoint of the range.’ ”

I understand that nobody wants to revisit the savings and loan scandal by encouraging banks to lower their standards to accommodate even the worst credit risks, but I can’t help but wonder why standards have relaxed for bigger companies and not smaller companies. “Moreover, while banks have loosened lending standards for big businesses during the recent economic recovery, they have maintained tight standards for small companies,” write the report’s authors.

None of this surprised me. As a small business owner, I’ve lived it. What does surprise me is the revelation that we can’t blame all this on the financial crisis or the Great Recession. The authors suggest, “Recent declines in small business lending also reflect longer-term trends in financial markets. Banks have been exiting the small business loan market for over a decade. This realignment has led to a decline in the share of small business loans in banks’ portfolios.”

Although the last few years have seen the aforementioned reasons impair a small business owners’ ability to secure financing, recent events are only a part of the problem. I don’t mean to be disagreeable, but the tens of thousands of small business owners who visit each month looking for a loan lead me to believe that there is demand. Instead of pointing fingers at the obvious problems associated with small business lending (there’s clearly enough blame to go around among bankers, regulators and small business owners), we need to start looking at what we can do to kick-start our economy’s job creation machine.

Wiersch and Shane conclude, “The confluence of events makes it unlikely that small business credit will spontaneously increase anytime in the near future. Given the contribution that small businesses make to employment and economic activity, policymakers may want to intervene to ensure that small business owners can access the credit they need to operate effectively. When considering means of intervention, however, it is important for policymakers to understand and take into account the multiple factors affecting small business credit. Any proposed solution needs to consider the combined effect of these factors.”

Not too many weeks ago, Ray Hennessey of called for the SBA to be abolished. I couldn’t disagree more with his arguments, but I do agree that the SBA has some problems. I’d like to challenge the new acting SBA administrator, Jeanne Hulit, to focus on making it less cumbersome, and hence more profitable, for banks to provide funding to small business. The beauty of this strategy is that Main Street isn’t looking for as much capital as one might think. Although there are many small business borrowers who visit Lendio looking for more, 59 percent of those who visit Lendio are looking for $50,000 or less. The SBA considers this to be a micro-loan. I suggest that Administrator Hulit offer incentives to community banks to make these types of loans by making the process a little easier. I’m convinced there are community banks out there willing and anxious to help the Main Street business owners in their communities, but the current system discourages it because a $50,000 loan carries the same burden of paperwork and cost as a $500,000 loan. I can’t blame those banks that are part of the SBA’s 7(a) loan program for moving upstream.

There are banks focused on helping the small business owners in their community, one of them is Holiday Bank in Salt Lake City, UT. They are doing a number of things to help the smallest small businesses in their community (other community bankers could take a lesson from these guys). And, the SBA could streamline the micro loan process. How about it, Administrator Hulit?

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