Big Banks & Small Loans: Why Is It So Hard To Get Funding?

Even as big businesses are awash in capital, many small business owners are having trouble getting the financing they need to grow.

The Institute for Local Self-Reliance recently published a backgrounder on the small business lending landscape and the findings are eye-opening.

Fifteen years ago, small business lending accounted for half of bank lending to businesses. Today, that figure is down to 29 percent. Additionally, bank lending to large businesses is up 36 percent, while small business loan volume has fallen 14 percent.

As a result, a larger number of small business owners are relying on high-cost alternatives to bank loans like high-interest credit cards. In a 1993 federal survey, only 16 percent of business owners reported relying on credit cards for financing. By 2008, that figure rose to over 40 percent.

Following are reasons that big bank lending is down for small businesses and why companies like SmartBiz are stepping in to fill the void.

Local community banks losing ground to large lenders

The decline in small local banks shrinks small business lending. The top four banks now control 43 percent of all banking assets, but account for only 16 percent of small business loans. Small business lending is the bread-and-butter of local banks. As community banks disappear, there are fewer lenders who focus on small business lending and fewer resources devoted to it.

Banks that do SBA lending are focused on larger loans

Since the mid 2000s, the number of business loans under $150,000 guaranteed by the SBA each year has fallen from about 80,000 to 24,000. Meanwhile, the SBA's average loan size has more than doubled to $362,000. Most large banks don’t want to make small SBA loans which means more business loans get denied.

Size does really matter to some banks

When it comes to small business lending, size does indeed matter to some banks. Many small regional lending institutions have minimum loan size requirements. Generally, borrowers need to have a $10 million loan size before they will attract the attention of such lenders.

The void in bank lending has spurred the growth of alternative lending, though many of these lenders charge high rates. However, companies like SmartBiz are bucking the trend by offering smaller SBA loans under $350k with a fast process, low rates and low monthly payments.