(FROM THE WALL STREET JOURNAL 11/27/15)
By Ruth Simon
The biggest banks in the U.S. are making far fewer loans to
small businesses than they did a decade ago, ceding market share to
alternative lenders that charge significantly higher rates.
Together, 10 of the largest banks issuing small loans to
business lent $44.7 billion in 2014, down 38% from a peak of $72.5
billion in 2006, according to an analysis of the banks' federal
regulatory filings.
Through August, banks this year originated 43% of business loans
of up to $1 million, down from 58% for all of 2009, according to
PayNet Inc., a tracker of small business credit.
The change has opened the door to higher-cost alternatives:
Nonbank lenders increased their market share to 26% from 10%, with
corporations that lend to their business customers or suppliers
making up the balance.
"At least 60% of our borrowers would fall into classic bank
lending criteria," said Rob Frohwein, chief executive of online
lender Kabbage Inc., which charges rates that average about 39%,
versus the typical 5% to 6% or so that banks charge small firms
with good credit.
At some big banks, the credit card has become the default loan
source for small businesses. Rates on cards issued to small
businesses average 12.85%, according to Creditcards.com.
At J.P. Morgan, the Ink small-business credit card accounts for
more than 90% of loans to businesses with $1 million or less in
revenue. One reason is that it costs the bank about the same to
originate a $100,000 small business loan as it does for one of $1
million, the company said. Credit cards cost a lot less to
issue.
"You have to figure out a way to make a $100,000 loan make
economic sense," said a J.P. Morgan spokeswoman, adding that a new,
centralized loan operation is supposed to cut the cost and time of
originating smaller loans.
The dollar amount of small loans to businesses held by banks
increased by an average of 7.3% a year from 1998 to 2008, said
DePaul University finance professor Rebel A. Cole, providing fuel
for economic growth. Firms with fewer than 500 employees account
for more than half of private sector jobs in the U.S. according to
the Bureau of Labor Statistics.
Banks of all sizes held $598 billion in small loans to
businesses as of Sept. 30, according to the Federal Deposit
Insurance Corp., down nearly 16% from a peak of $711 billion in
2008. By contrast, loans to larger companies increased 37% during
that time.
The largest banks "have essentially abandoned the small business
market," said Mr. Cole, who analyzed bank regulatory filings for
The Wall Street Journal. The analysis looked at loans of up to $1
million, adjusting for bank mergers and acquisitions.
Weak demand, tighter lending standards and high costs have put a
lid on small business borrowing in the past seven years, even as
other types of financing -- home mortgages, auto loans and
corporate finance -- have rebounded.
A prolonged decline in new business formation has reduced the
borrowing pool. Plus, banks have been slower to ease lending
standards for small firms than for big ones after the
recession.
Many banks are less interested in small business lending because
it isn't as profitable as loans that more easily fit into
standardized approval and repayment processes -- such as credit
cards and mortgages -- and can be packaged into securities for sale
to investors, according to Federal Reserve Bank of Cleveland senior
policy analyst Ann Marie Wiersch.
Small business loans are often as nearly as complicated for
banks to complete as large loans, with less return. "We all
struggle to make money on the lending side," said Jay DesMarteau,
head of small business banking at TD Bank. "It's a lot of work to
try and find these little companies, underwrite them and manage the
book."
Jorge Rodriguez, owner of a Peruvian restaurant in Los Angeles,
said Wells Fargo & Co. -- his bank for several years -- turned
him down three years ago when he sought financing to remodel and
expand.
"They wouldn't even look at me as a viable client," said Mr.
Rodriguez, who secured a $311,000 Small Business Administration
loan from BBCN Bancorp Inc., a local community bank, with a recent
rate of 5.5%.
Wells Fargo rejected Mr. Rodriguez again in 2014, he said, this
time for a $25,000 loan to buy liquor and other supplies. He turned
to two online lenders, with rates above 80%. He has since
refinanced those high-cost loans and secured additional funding to
expand from Opportunity Fund, a nonprofit lender, that had an
annual rate of 12.3%, the lender said.
A Wells Fargo spokesman said the bank follows a consistent
process for evaluating loan requests but doesn't comment on
specific borrowers.
All 10 banks in the analysis conducted for the Journal said they
remained committed to small business lending. Some said the
government data doesn't capture small-business loans above $1
million, the reporting threshold.
Two of the banks, Wells Fargo and Capital One Financial Corp.,
said they partner with nonprofit lenders that provide credit to
small firms that may not qualify for conventional loans. Wells
Fargo said it extended roughly $50.9 million in loans, investments
and grants to nonprofits that support small business economic
development in 2014.
Bank of America Corp. began offering lines of credit of $10,000
to $100,000 this summer using a less expensive underwriting process
that includes a review of checking and merchant payment processing
accounts, instead of checking years of tax returns and financial
statements.
Before the new program, "if you wanted $10,000, $15,000 or
$20,000 in credit, the option we would give you would be a credit
card," said Bank of America Small Business Executive Robb Hilson.
"If someone wants to buy a forklift, it doesn't make sense to put
it on a credit card."
(END) Dow Jones Newswires
November 27, 2015 02:47 ET (07:47 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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