Is there a gap in commercial lending to small businesses?

Data indicates a decline in the smaller loans many small businesses need. Even with the economy in recovery after the Great Recession barriers to credit still persist for many small businesses.

There is a persistent gap in small business lending, particularly when it comes to traditional banks and to smaller loans. According the 2016 Federal Reserves Small Business Credit Survey, the top challenge small businesses faced was a lack of access to financing. Fifty five percent of these businesses sought less than 50,000 dollars in funds with 60 percent getting less money than they requested. All too often small businesses seek financing from traditional banks, the least likely institutions to approve small dollar loans. Traditional banks only meet 52 of the 80 billion dollar demand for small business financing and that number seems to be declining. Clearly smaller businesses requiring smaller loans are finding it difficult to get the money they need.

Small businesses, defined as any business making less than a million dollars in annual revenue, seek financing most often to fund new growth opportunities. 64 percent of small business owners sought loans to expand their businesses in 2016. Additionally many small businesses need financing to smooth out uneven cash flow. The median small business owner keeps just 27 days worth of cash in reserve. The gap in lending to small businesses not only hinders their ability to grow it also makes their day to day financial situation more uncertain.

This persistent decline in small business lending could be down to the impact of regulations on smaller community banks. These community banks are the preferred source of small business financing. The Federal Reserve in Minneapolis estimated that regulations made lending 30 basis points (one hundredth of one percent) more expensive for smaller banks holding less than 50 million dollars in assets. Whatever the impact of new regulations may be, community banks are being consistently consolidated by larger ones. There were just 5,170 banks in the US last year. This number is in stark contrast to the 11,463 banks that existed in 1992. Regulations and the resulting consolidation of community banks may be having an impact on the ability of small businesses to access credit.

The main problem is big banks are less likely to make the small dollar loans and consider small business lending risky.

Small business Texas Commercial Loans are inherently risky and considerably less profitable for big banks. Small business often don't have the detailed financial information traditional lenders require. Big banks often use a slew of statistics to determine whether or not a borrower is qualified. Many small businesses simply don't have the time or resources to gather this information. Without this information traditional banks consider small businesses risker to lend to than their larger counterparts. A million dollar Texas Commercial Loans takes an equal amount of resources to process as a small one. No matter the size of the loan the expense of underwriting is the same. Therefore big banks consistently issue larger loans because these loans are inherently more profitable.

The impact of regulations following the great recession and the consolidation of community banks means small business are finding it increasingly difficult to access financing.

The pressures of the recession may have abated in the banking industry, but the number of small dollar loans issued continues to decline. Community banks, which in the past, served the financial needs of small businesses are disappearing. In place of smaller banks, larger ones are emerging, which see small business lending as risky and expensive. Regulation, consolidation, a lack of information on the part of small business owners and the costs of underwriting are all likely factors to explain the decline in small business lending.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:      (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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