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The Decline in Small Business Lending: Cause and Effect

Small business lending has declined significantly since the recession, but why? It’s too easy and insufficient to just blame it on a poor economy. The truth is the economy is improving, business owners are optimistic and one would think that, with an improved economy, lending would increase. But this is not the case. Yes, the recession had an indirect effect on business lending trends, but what are the direct effects?

Many are saying that the decline in small business lending is having a negative effect on the economy and may be the last obstacle business owners have to overcome before everything is recharged. Lenders, such as banks, see small businesses as riskier propositions than they used to be. Because fewer small businesses have the cash flow, credit scores, or collateral that banks want to see, loans have stalled.

Currently, small businesses employ nearly 40 percent of the private sector’s contributions to gross domestic product.

Multiple views are held by many over what the exact cause of the decline in small business lending is. In fact, there are two points of contention between banks and business owners.

Banks: Believe the problem falls within owners and regulators. Owners for cutting back on loan apps and regulators for getting banks to strengthen their lending standards. Increasing lending standards diminishes the number of creditworthy small business owners.
Small business owners: Say that the problem is with bankers and regulators. Bankers for increasing collateral requirements and regulators for making loans more difficult to get.

So who is right and who is wrong? There is no right or wrong answer; the reason for the decline of small business lending is a combo of everything above, with more minor causes in between.

Let’s look at the major factors affecting small business lending:

Small business financials have remained weak, decreasing loan approval rates.
Collateral values are suffering and this limits the amount business owners can borrow. Collateral usually consists of real estate assets, and since commercial property values have declined, it’s hard for owners to come up with valid collateral.
Regulators have caused banks to increase lending standards
Bank consolidation has reduced the number of banks focused on small businesses. Small businesses have also become less profitable than other areas of lending, including large businesses.
Weak earnings and sales mean that fewer small businesses are looking to grow and when this happens, the demand for business loans is restrained.

Of course, the Recession precipitated all of the reasons above, but to say the “Recession” is continuing to be responsible would be closer to inaccurate than accurate. The specific reasons stated above tell much more of the story.

AmeriMerchant, a leader in small business lending, understand what small businesses are going through. We can get you the financing you want in the form of a Merchant Cash Advance or Small Business Loan. For more information, call us today at 1-800-267-3790.

Published: May 6, 2014
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David Goldin

David Goldin is the President & CEO of AmeriMerchant, a leading provider of working capital solutions for businesses including merchant cash advances and business loans. Founded in 2002, AmeriMerchant has over 120 employees and is headquartered in New York City. David's previous experience includes co-founding an Internet development company and building it from four to fifty people that was eventually sold to a multi-billion dollar publicly traded telecommunications company. David is also a founding member and President of the North American Merchant Advance Association (NAMAA), a 501c trade association for the merchant cash advance industry.