By: Julie Story
Small businesses are the backbone of the U.S. economy. They employ the majority of Americans and help keep local economies alive. The effects of the recession took a toll on small companies and made it difficult for many of them to stay afloat or expand.
In an effort to stay competitive in a down economy, many small businesses turned to big banks for funding. However, large banks have been noticeably unresponsive to small companies' requests for assistance. A recent Biz2Credit.com report shows that despite the significant financial resources the country's largest banks - those with $10 billion in assets or more - spend on advertising small business products, these banks reject nearly nine out of 10 loan applications.
The study also revealed that Bank of America, JPMorgan Chase, Wells Fargo and TD Bank were the institutions that most frequently rejected their own small business customers for financing.
In addition to rejecting the majority of the small businesses that approach them, big banks also carry considerably more economic risk than smaller institutions. Large institutions invest outside of communities and opt instead for a global portfolio. This leaves them open to considerable risk, as evidenced by the JPMorgan Chase $2 billion trading loss. Upon further investigation, a Marketwatch report reveals JPMorgan's disastrous trading loss surpassed the initial $2 billion estimate, and may actually be closer to $9 billion in a worst-case scenario. This increased liability may also affect small businesses that obtain loans, because financial crises may prompt banks to raise rates.
Community banks and credit unions provide more affordable small business banking products and have significantly higher approval rates than large institutions. In addition, smaller institutions generally offer more favorable terms than megabanks, allowing small businesses to invest more of their capital in growth and the community.