By: Julie Story
Restricted lending and unfavorable terms have left a sour taste in the mouths of many small business owners, who are now turning to smaller institutions for financing.
The results of Biz2Credit's June Small Business Lending Index reveal lending has increased among smaller institutions, such as community banks, while big bank financing only grew slightly. Small business loan approvals at large banks grew by half a percentage point from May to 11.1 percent. Smaller banks, in contrast, experienced approval increases of 2 percentage points, bringing the overall rate to 47.5 percent.
"Small banks are the big story this month," said Rohit Arora, CEO of Biz2Credit. "They have made a lot of SBA 7(a) express loans, which used [to] be the strength of the largest banks."
Community banks and credit unions have shored up small business banking products to not only make them more appealing to small business owners, but also more affordable and flexible than those offered by larger institutions. Financing is generally used to cover start-up costs, resolve cash flow crises, increase business hiring and expand operations.
Scott Shane, a professor who teaches Entrepreneurial Studies at Case Western Reserve University, said the growing trend is a positive sign because small banks are generally a better fit for small businesses. In a recent Bloomberg column, Shane explained the various reasons that small banks were more financially equipped to accommodate the needs of Main Street companies that megabanks.
"Small lenders are less likely than their bigger counterparts to focus solely on credit scores and financial statements during the evaluation process, and more likely to rely on small business owners' character and relationships," he wrote.
In addition, small banks were more likely to develop personal relationships with business owners and offer more flexible terms because the amount of small business loans makes up a higher percentage of the institutions' total assets.
The most recent Thomson Reuters/PayNet Small Business Lending Index, a measurement of small business financing volumes, increased 18 percent in May from the same period in 2011. However, June's Small Business Optimism Index shows a three-point decline to the lowest level seen since October 2011. Analysts say that while lending among smaller institutions is opening up, the slow economic recovery, stubborn unemployment rates and stunted consumer spending continue to weigh on Main Street businesses.