On July 2009, the Small Business Administration’s Office of Advocacy published the combined findings of four separate studies into a research survey titled “Small Business in Focus: Finance.” More than 4000 small companies made up the representative, nationwide sample.
In an attempt to see what characteristics historically are helping and hindering small companies from getting vital financing, we concentrate on two of the studies: “Lending to Small Businesses by Financial Institutions in the United States” and “Who needs Credit and Who Gets Credit?” For the full survey text visit www.sba.gov/advo/research/09finfocus.pdf.
“Small business” as defined by this study, (and usually by the SBA) is a company with fewer than 500 employees. However, the study notes that “most small businesses are very small dealing with one or a few individuals.”
* Loaning Smorgasbord. Most prevalently, small companies are individually picking and choosing from a surprising variety of funding sources. Yet banks still hold the majority of the loans. Over the past five years, commercial banks have taken on 58 percent of the small businesses’ total debt - totaling $718 billion. While the number of bank companies and independent institutions is steadily dwindling, the actual number of offices continues to rise, with the U.S.’s 7,485 depository institutions offering 97,300 branches as of June, 2007.
Between 1998 and 2003, the number of small businesses using some form of credit jumped from 80 to 90 percent, with even more percentage increases estimated for the past five years. Credit cards increasingly came into play to stop the debt gap. While 60 percent of firms surveyed used some form of traditional loans, 80 percent claimed to use some type of nontraditional funding, with personal or business credit cards being the most popular instrument. Moreover, 41 percent of company owners claimed to have used business credit cards, supplied largely by banks.
* You Want How Much? Generally, even prior to the recession. businesses remained modest and tightly reined on their borrowing. Of the over 2 billion business loans made in 2007, more than one quarter (522.75 million) ranged between $100,000 to $1 million. Another 21.6 million were under $100,000. The average loan was under $200,000.
Lending to small businesses has increased steadily in both value and number for the past decade and a half. But it is the microloan category (under $100,000) that has seen the greatest explosion of growth - up 300 percent from 1995 to 2007. This means while small business’ numeric share of bank loans is expanding, the actual dollar percentage of banks’ portfolios continues to decline. In short, the little borrower may be seen as more trouble than he is worth.
* Large vs Small Banks. Since 1998, banks have undergone great consolidation due to the easing of interstate regulations. Throughout the past decade, small lenders, such as community banks, have taken an ever declining percentage of the small loan market, while huge lenders have gobbled up the difference. For example, the smallest banks with assets under $100 million claimed 7.69 percent of the small business loan market in 1998, while major banks with over $10 billion in assets took 47 percent. By 2007, however, these littlest community banks held only 1.48 percent of the small business market while the biggest players held over three quarters of that market.
Here again is the sign that small business’ greater numbers of loans made in ever smaller amounts could only profitably be handled by enormous banks which could bundle (and probably resell) them to buyers several steps removed.
* The Company You Keep. The survey entitled “Who Needs Credit and Who Gets Credit?” indicated that one’s company structure and profile were strongly correlated to its credit success. Proprietorships are traditionally seen as more creditworthy than partnerships or corporations because the lender can seize the proprietor’s personal and business assets. As a result, proprietorships were responsible for 46 percent of the loans in 2003, while partnerships stood at only eight percent. S corporations gained ascendancy over C corporations in loan application success, with 31 percent of S corps surveyed receiving loans in 2003, as opposed to only 14 percent of C corps.
* The Gets vs the Get Nots. Compared with firms that received loan approvals, those who were denied: - are significantly smaller. - are more likely to be proprietorships, less likely to be C corporations. - have younger or African American owners with less personal wealth. - are located in urban Areas. - have less education and business experience. Other commonalities among those denied match the standard roster of lender requirements: weaker credit history, e.g. late payments and bankruptcy; a short term relation with the lender; firm delinquencies; low D&B score, etc. After controlling all possible variables, the survey showed that African American company owners are significantly more likely to be denied or discouraged from applying than white owners. And this percentage has increased over time, rather than decreased.
Many statistical arrows of the SBA survey point toward an increasing flow of lending toward fewer and larger lenders. Further, this trend coincides with a diminishing of the individual small business borrower in the eyes (and portfolio) of his lender. By the time most of the data was completed for the studies, one could sense the brewing recipe for financial disaster. Question is, after the boil over of the current recession, are we simply refilling the pot with the same destructive ingredients? Biz4
