Banks Cut Back on Small Business Loans

Banks Cut Back on Small Business Loans

  • November 25, 2018

Sadly, the days of driving to your local bank for a business loan are long gone. Over the past two decades, small business loans have fallen from about half to under 30 percent of total bank loans. Community banks have been eaten up by the big banks and focus on other forms of lending in the face of burdensome regulatory requirements. This results in small businesses being declined more than 80% of the time.

Search Costs are High for Both Borrowers and Lenders

Studies show that the average small business owner has to approach multiple banks and spend about three to four full days filling out detailed applications before they can find a bank willing to lend to them. Federal Reserve research finds that small business borrowers often spend almost 25 hours on paperwork for bank loans and approach multiple banks during the application process. Successful applicants wait weeks or more for the funds to actually be approved and available.

Factors Reducing Bank Loans

This secular decline is due to a multitude of factors, including high transaction costs of small business loans and regulators that push banks to hold more capital against business loans than consumer loans, further driving up the costs of small-business lending.

Increased regulation

Banks have had to tighten up their standards and be extra-cautious about the risk in their portfolios. Unfortunately, small businesses are inherently riskier than their larger counterparts, which makes banks think twice before extending them credit. Increased regulation often makes these types of loans too costly for banks to pursue.

Downturn in community banking

Small businesses have historically had more success finding a loan at a community bank than a big bank. In fact, community banks have 3x the approval rates on small business loans than the big banks. But, our number of community banks have been declining since the 1980’s, inadvertently hurting America’s job creators. With fewer community banks, there is less opportunity for business owners to find a loan at a traditional banking institution.

Less profit on smaller loans

More often than not, small business owners are looking for smaller loan amounts. In fact, our average loan size is approximately $50,000. Unfortunately, it doesn’t make financial sense for banks to provide these smaller loans because it costs banks as much (and often times more) to underwrite and service a $1 million dollar loan as it does a $100,000 loan. Therefore, they can make way more money focusing on larger loans. At the end of the day, banks are businesses too.

FinTech Has Made Online Lending Easier

Thankfully, during the past decade, the market changed. FinTech companies took advantage of internet technology and began to offer loans online. The reduced regulatory requirements means less paperwork and a streamlined process. This allow online lenders to offer simpler underwriting and faster approvals.

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