Fed Policy Analyst Addresses MVEDC Bankers' Breakfast

Wednesday, February 11, 2015

VIENNA TOWNSHIP, Ohio – The recovery continues to gain strength, large corporations report record profits and stock markets reflect this rebound from the Great Recession as they reach new levels.

Not fully participating in the recovery are many small businesses as reflected by levels of bank lending to this sector. Bank lending to small-business owners is yet to return to the levels before the Great Recession, a senior policy analyst at the Cleveland Fed told commercial lenders Tuesday.

For small businesses, “The recovery is slow but conditions are improving,” said Ann Marie Wiersch, the senior policy analyst for community development at the Federal Reserve Bank of Cleveland.

Since the end of the Great Recession in June 2009, banks have seen their assets rise 31% and lending to large businesses has grown 43%, but “small-business loans are down 17% in absolute terms and 23% adjusted for inflation,” she related.

Wiersch addressed the Lenders’ Appreciation Breakfast that the Mahoning Valley Economic Development Corp. holds annually at the Avalon Golf & Country Club Squaw Creek. She spoke on her own research, the 2014 Joint Small-Business Credit Survey (CLICK HERE) conduced by the Federal Reserve banks of New York, Atlanta, Cleveland and Philadelphia, and the rise of alternative lenders.

She attributed the decline in lending to small businesses to the cautious mindset their owners maintain as they’re reluctant to approach their banks for more credit. Banks have relaxed their standards somewhat since 2010. “The lending environment is friendlier,” Wiersch said, “ but standards are still tighter than before the recession.”

Banks compete vigorously to lend to strong small businesses but have retreated from lending to the sector as a whole. That’s because they’re “time-intensive and more expensive to monitor.”

In addition, she reports “a shift in the mix of lenders.” Twenty years ago, community banks made more than half the loans extended small businesses, the senior policy analysts said. Today they make less than a third. Today, half the loans taken out by small businesses come from large banks.

Moreover, when the Great Recession hit in mid-2008, banks were quick to call in their loans or demand more collateral. Because owners had put up the equity in their homes as collateral – and the values of their personal real estate fell – they were often hard-pressed to meet the more stringent requirements.

Among the findings of the Joint Small Business Credit Survey:

35% of the owners reported they ran a profit in the first half of 2014, 26% broke even and 39% operated at a loss.
From July 1, 2013 to June 30, 35% said their sales grew, another 35% saw no change and 30% reported a decrease in revenues.
In ranking their top challenge, 23% said, “Attracting customers”; 18% said lack of credit; 18% said uneven cash flow; 13% said increased costs of running their businesses; and 8% responded compliance with government regulations.
Startups (those five or fewer years in business) said their top challenge was lack of credit; growers (those profitable and enjoying increasing sales) and mature businesses (more than five years in business, 10 or more employees and that hold debt) said uneven cash flow.
42% of all small businesses reported they hold debt.
22% said they applied for credit the first half of last year: 62% asked for $100,000 or less, 11% wanted $100,000 to $250,000; 10% sought $250,000 to $500,000; 13% between $500,000 and $2 million; 3% more than $2 million; and 2% weren’t sure.
35% approached a large national bank, 41% a large regional bank, 34% a small regional or community bank and 18% an online lender.
Approval rates ranged from 61% for a loan and 53% for a line of credit to 28% for a Small Business Administration line of credit to 8% an equity investment.

Companies with less than $1 million in revenues had the highest rates of rejection, Wiersch said. Business owners attributed the denial to low credit scores and insufficient collateral were more likely to be denied.

The above factors have resulted in the rise of alternative online lenders seeking to fill the void.

Data is hard to come by as to their numbers and sources of funding. They are lightly regulated, if at all, but they offer small-business owners the benefits of quick turnaround times and easy access based on minimal documentation. These unsecured loans come at a cost -- higher fees and higher interest rates, Wiersch said. The annual rates “run from 25% to 150% and higher.”

Their market share, while relatively small, “has grown rapidly, doubling each year since [the end of] the recession. … Technically, they don’t make loans.” There are different types of online alternative lenders, each offering different credit products.

They are:

Merchant cash advance. Enables a business to convert future receivables into capital, repaid with daily swipes of credit card receipts.
Payments processor. Takes a percentage of each customer credit card transaction made through the processor as payment for the funds advanced.
Peer-to-peer. Evaluates borrowers’ creditworthiness and connects them with investors willing to lend.
Marketplace. While not lenders themselves, these sites enable borrowers to shop for loans from both traditional and alternative sources.
Online direct. Bases its lending on the owner’s cash flow and balance sheet, but also uses criteria no bank would use, such as Facebook “likes.”

Pictured: Ann Marie Wiersch.

Copyright 2015 The Business Journal, Youngstown, Ohio.
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