Wednesday, February 28

U.S. Banks are Still Holding a Tight Grip on Small Business Loans

Although the economy has been steadily improving over the past few years, the small business lending industry has been slow to catch-up — and many small business owners are feeling the lag.

In Carrollton, Georgia, Brandi Shirey is hoping to expand her cake shop business, which she started up four years ago. Since then, the demand has grown to a point where the shop can’t keep up. She hopes to borrow $20,000 in order to move to a new, larger storefront. Shirey, though, knows that even with her store’s positive financial history, she’ll need a bulletbroof credit record and paperwork in order to receive a bank loan. Things “aren’t what they used to be,” said Shirey in an interview with The Wall Street Journal.

Although banks have been loosening their grip on tight restrictions year by year, there is still a big gap between what they are lending now, and what was being lent in 2008 before the recession hit. At the end of the first quarter this year, banks were giving out $585 billion in small business loans — almost 20% less than the $711 billion that went out in 2008.

By contrast, loans to all businesses are actually up 9% since 2008. While this is a sign of an improving economy, it also represents some of the stress that is on small businesses — it’s much more difficult for them to obtain a loan than it is for medium and large businesses, which reap the benefit of more relaxed standards.

Part of the problem is that there are less banks, period. After the 2008 banking crisis, many banks were forced to close up shop. Less banks means less options for small, local businesses looking for a loan.

Biz2Credit co-founder, Rohit Arora, agrees. “The failure of so many small banks there has created a credit desert,” he explains. Another issue might be reluctance on the part of some small businesses, themselves. The recession shook many people up and made a number of entrepreneurs less sure about the benefits of taking on debt, and banking their future on the idea that the economy would be improving.

Is there hope for small businesses? Certainly. The economic outlook is constantly changing, and many banks and alternative lenders will look to fill the gap soon enough.

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