SBA Turns Attention To Credit Unions To Revive Small Biz Lending

The financial services market has progressed by leaps and bounds in terms of innovation, from the rise of alternative finance to the development of technologies like blockchain and open banking initiatives. The global financial crisis in 2008 was, in many ways, a catalyst to this innovation, especially in the area of small business (SMB) finance, as banks pulled their services away from SMBs and FinTechs stepped in to offer another option.

Now, a decade on, small business optimism is up in the U.S., despite a flurry of concerns over regulations, economic development and more.

About a third of SMBs recently told Capital One they’re currently in a better financial position than they were a year ago, for instance. Meanwhile, 71 percent of SMBs told Wells Fargo and Gallup that their financial situation is at least somewhat good.

But a new report from the U.S. Small Business Administration (SBA) may call into question whether the rebound in SMB optimism is linked to a rebound in access to finance. In fact, according to the SBA’s latest report, corporate finance has largely bounced back in the nation — but small businesses aren’t seeing much of that recovery.

“There’s been a big rebound in lending to big businesses, but there’s been a very small recovery in lending to small businesses,” said Rebel Cole, Ph.D., author of the report and Florida Atlantic University’s Kaye Family Endowed Professor in Finance. “The repercussions of this are huge. Small businesses account for about half of all private sector employment, about half of all net job growth and about half of gross domestic product.”

“If small businesses can’t get credit, they can’t grow,” he continued. “They can’t hire people; they can’t invest in new plant equipment, so the economy can’t grow. That’s one big reason we’ve had such an anemic recovery since the financial crisis, is the small business sector has been constrained.”

In its report, the SBA outlines several recommendations for policymakers to encourage an expansion of small business lending among the traditional financial services industry. They include the creation of new community banks, the reduction of regulatory constraints on small banks and the support of traditional non-banks.

Below, PYMNTS breaks down some of the key data in the SBA’s report that initiated the development of those recommendations.


—Small business loan origination is only 40 percent of pre-financial crisis levels, with the total number of SMB loan originations plummeting by nearly three-quarters during the financial crisis. Still, while there is evidence of recovery, the SBA found levels remain significantly below pre-crisis levels. Further, large banks saw a more pronounced decline in the number of originations during the financial crisis than small banks, researchers found.

—5 percent: the rate of decline for troubled banks’ business lending during the financial crisis, though for healthy banks, business lending actually grew during this time by 5 percent per year. The SBA noted, however, that the figure is in stark contrast to healthy banks’ previous corporate loan growth rate of 15 percent before the financial crisis (even troubled banks saw pre-crisis business loan growth at a rate of 3 percent per year).

—4 percent: the rate of growth of small business lending among healthy banks following the financial crisis — twice the growth rate of SMB lending at troubled banks, the report found. Small business lending at small banks following the crisis grew at a significantly faster pace than at large institutions, the report said.

—The number of data items found in the Consolidated Reports of Condition and Income for Eligible Small Institutions was reduced by 40 percent following policy revisions. In short, this data point demonstrates how a reduction in regulatory burdens on banks can lead to greater efficiency at these financial institutions and may help them increase their small business lending activity.

—Credit unions cannot invest more than 12.25 percent of total assets in business loans to members, a limit that the SBA suggests could perhaps be increased in order to spur small business lending at these institutions. Credit unions are critical to small business lending, the SBA noted, with credit unions having more than doubled their SMB lending activity between 2008 and 2016, hitting $60 billion. Meanwhile, bank lending to small businesses dropped by nearly $100 billion during that time.