Small Businesses Lending Slow To Recover Even As the Economy Rebounds

Six-years out, the United States economy seems by most measures to be settling into a stable if unspectacular recovery. The jobless rate is below 7 percent, below pre-, consumer spending was up in Q2 and stock market has been seemingly unstoppable for most of the summer. Small-businesses, however, are the sector of the economy that is increasingly being left behind.

Lending to small businesses, necessary for their growth, has not been recovering, and by most standard measures remains depressed well-below precession levels, reports The Wall Street Journal.

In the lending landscape, that trend is an outlier. On the whole, the business lending picture has shown strong signs of improvement. According to the Federal Deposit Insurance Corporation (FDIC), loans to business of all sizes have increased by 9 percent since 2008 to around $2.5 trillion.  Lending on the whole is also showing strength—standards are starting to show some flexibility for consumers and the Federal Reserve reports that overall loans and leases grew at their fastest rate during the second quarter of 2014 since the end of the financial crisis.

And yet persistently belying the old adage “a rising tide lifts all boats,” SMB lending seems stuck in a perpetual low tide.

By the end of the first quarter of 2014, small business lending had seen a slight lift since September 2013—up one percent with bankers holding $585 billion in loans to SMBs. While all improvement is likely hailed as good news in the SMB community, the reality is that this figure represents a 17 percent decline from the 2008 peak of $711 million, according to the FDIC.

In nearly one-third of all U.S. counties small business loans are below their 2005 levels, according to Illinoise-based SMB loan tracking firm PayNet. Loans for less than $1 million have taken a particular hit, down 14 percent down to 23.5 million since 2008.

The problem seems to be hitting hardest regionally and locally. Small businesses in communities that saw local banks wiped out by the Great Recession are now facing the brunt of the slow down in lending to their sector.

“The failure of so many small banks there has created a credit desert,” Biz2Credit co-founder Rohit Arora told The Wall Street Journal.

In tiny communities, like Carrollton, Georgia, small business with a more than two years of successful operations and a solid credit history are finding themselves unable to get traditional bank funding where they would have easily in the past, reports the The Journal. Deals that could be made on golf courses and relationship based lending have passed away in communities like Carrollton because of the Great Recession.

“You would think any banker who came in for lunch and saw how busy we are would want to work with us,” Carrollton restaurant owner Tano Phommasith, told The Wall Street Journal. Phommasith sought a loan to move locations and expand—he was turned down by most major players and now suffers under a high interest rate.

There is some evidence that the situation may be beginning to turn around some for small American entrepreneurs. According to Moody’s analytics the total amount of commercial and industrial loans held by small U.S. banks increased 11 percent from 2013. Small bank are considered more likely to focus on small businesses.

The market is also changing. Online nonbank lenders such as FundingCircle, Kabbage, Fundera or OnDeck are becoming an increasingly attractive for small businesses seeking loans as banks scale back their efforts.

In 2014 nonbank lenders provided approximately $3 billion in loans to small, more than doubling the 2013’s amount, according to Business Financial Services.

And the P2P loans providers have an eye on expansion.

OnDeck is pushing toward an initial public offering that is pegged to bring its valuation to around 1.5 billion, according to sources familiar with the matter.  OnDeck has arranged over $1 billion in financing, distributed across about 20,000 loans since launching in 2007. Loans typically range from 5K to 250K, and are to be repaid in about 24 months.

LendingCircle is also facing an IPO this year, one that will likely value the company at approximately $4 billion.

The services differ in how the loans are offered—LendingCircle relies on a P2P model that bring investors and business together, OnDeck draws from its own pool of capitol to award loans. What they have in common, however, is an alternate form of determining credit worthiness. Instead of using traditional loan criteria, these companies rely on algorithms to determine creditworthiness based on a business’s activity. Things taken into account include social-media ratings and reviews—as opposed to a straight credit score.

These services could offer a strong future competitor for traditional banks loans, if such loans remain hard to come buy.

However, nonbank online services have their own hurdles to face. They have recently drawn the attention of state and federal regulators, as the loans are often associated with much higher interest rates than those typically offered by banks.