5 Trends in Small Business Lending

  • Posted on: 11 October 2014
  • By: Leonard Shostak

In my recent blog post on the 3 Key Changes You Should Know About Small Business Loans I reviewed key improvements made by the government to the loan application and approval process, which streamline some of the requirements banks use to grant SBA-backed loans. While removal of the cash flow analysis and debt service coverage analysis will make the loan application process much easier for small business owners, the overall trends in small business lending have not changed significantly—small banks continue to provide fewer loans to small businesses. Here are five trends in small business lending that explain why this is the case:

Banks Remain Risk Averse after the Recession

With falling sales and a much weaker collateral for small businesses, it’s no surprise that most banks remain risk averse to small business lending even after the recession.

Loosening of Loan Terms for Small Businesses is Much Slower Than The One for Larger Firms

While measures of tightened loan terms are loosening, such measures have eased much faster for large firms compared to small businesses. Small business owners continue to face loan terms that are much more stringent than the ones for larger firms and more established businesses.

High Failure of Community Banks

Community banks are the main source of loans for small businesses. With the high rate of failure of these banks, most of them are merging with bigger banks and fewer new community banks are starting up. With these trends, borrowing continues to be a significant challenge for small business owners.

Increased Regulatory Requirements

More regulatory requirements demand that banks increase their capital reserves. By keeping capital reserves high, banks issue fewer loans, which has the most profound impact on small businesses.

Structural Barriers Depress Bank Lending

In addition to these ongoing trends in small business lending, there are structural barriers that contribute to the low rate of lending to small business owners. Costs of small business lending are generally high and many community banks are consolidated within bigger banks, which creates additional barriers to small businesses.

Considering the current trends in small business lending, it’s no surprise that three out of four small business owners never sought loans for their business—a fact also outlined in this Huffington Post article. It’s important for small business owners to follow trends in lending and understand the key reasons behind such tendencies so that they become better prepared in the event that they decide to apply for a small business loan.