Big Banks Scaling Back On Loans To Small Businesses

Date: December 02, 2015

Businesses Turning To Alternative Lenders, Which Charge Higher Interest Rates

According to a recent Wall Street Journal analysis of the federal regulatory filings of large US banks, loans to small businesses are down from their levels 10 years ago, as more alternative lenders step into the market, charging businesses higher interest rates for loans. The 10 biggest banks issuing small loans for businesses lent these businesses $44.7 billion last year, down from a height of $72.5 billion in loans in 2006. An analysis from small business credit tracker PayNet found that for the year through August, large banks granted 43% of business loans of up to $1 million. This is down from 58% of all business loans for all of 2009. During this time, nonbank lenders have boosted their share of the market from 10% to 26%. Remaining loans to small businesses have come from corporations that lend to business customers or suppliers. Some big banks now use credit cards as the default small business loan. Cards issued to small businesses have an average interest rate of 12.85%, according to Creditcards.com. This compares to a typical bank loan rate of 5% to 6% for small businesses with good credit, and to an average rate of 39% for online alternative lender Kabbage. Kabbage CEO Rob Frohwein said, “At least 60% of our borrowers would fall into classic bank lending criteria.” First Annapolis Consulting estimates that small business spending for credit and charge cards will rise to $445 billion in 2015, up from 2006’s total of $230 billion.

What This Means For Small Businesses

As big banks appear to by shying away from traditional loans, small business owners are increasingly left with more costly loan options in either the form of a bank credit card of a high-interest loan from an alternative lending site. The Journal suggested that a multitude of factors are leading to this – from weak demand, to tougher federal regulations on lending practices, to higher costs for lenders. Ultimately, this tightened regulatory environment may be stifling small business growth, an important contributor to overall US economic growth.

Additional Reading

Reuters reported on a decline in October small business borrowing.

Note: this article is intended to keep small business owners up on the latest news. It does not necessarily represent the policy stances of NFIB.

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