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:
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:
Pictured: Ann Marie Wiersch.
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