Fed survey cites economy, legislative changes and competition as key reasons.
Small businesses were largely shut out from the economic recovery over the past decade when it comes to business lending. Unfortunately, the most recent Senior Loan Officer Survey conducted by the Federal Reserve indicates that this isn’t likely to change in the near future. In fact, it’s probably going to be even more difficult to get a small business loan from a commercial bank.
According to the survey, smaller banks are beginning to tighten their standards for commercial and industrial lending and beginning to charge premiums on riskier loans. Large banks, on the other hand, appear to be moving in the opposite direction by, “increasing maximum credit lines, easing loan covenants, and narrowing loan rate spreads over costs of funds.” Most of the bankers surveyed, however, appear to share the belief that the economy is slowing down.
"Small business loans are generally more difficult to underwrite because the business owner typically guarantees payment of the loan."
We’ve written extensively about the conundrum that small business owners have faced in the aftermath of the financial crisis in 2008 and 2009. Banks were under tremendous scrutiny and pressure to reduce their balance sheets and increase cash reserves. Small business loans are generally more difficult to underwrite because the business owner typically guarantees payment of the loan. Therefore, it takes more time and is usually considered riskier because so much hinges on the business owner. Reducing a business loan portfolio was therefore an easy decision for most banks.
"These days, online lending is far more mature than it was."
This created a vacuum in the market for small business lenders with automated underwriting capability and quick turnarounds. Merchant cash advance lending increased dramatically during this period and some technology start-up companies raised a ton of capital to fill the void. The upside for these firms was enormous and it seemed like a good deal for business owners. But it became evident that the automated functionality was prone to fraud, unethical brokers drove up payback rates and the funding sources backing the loans required fast payback. These factors combined to create an unsavory environment that saw bad actors take advantage of small business owners and regulators took notice.
These days, online lending is far more mature than it was. There are even some more reasonable loans to be had through these online lenders. And now that it appears that commercial banks won’t be roaring back into the small business lending market any time soon, the online business lending industry is going to continue to mature and improve.