A significant share of locally owned businesses are struggling to secure the financing they need to grow. Our 2014 Independent Business Survey found that 42 percent of local businesses that needed a loan in the previous two years had been unable to obtain one.
One consequence of this credit shortage is that many small businesses are either not adequately capitalized or have been forced to rely on high-cost alternatives to conventional bank loans, such as credit cards. Both scenarios make them far more vulnerable to failing.
Lack of sufficient small business capital is a major concern for the economy. Historically, about two-thirds of net new job creation has come from small business growth and studies show locally owned businesses contribute significantly to the economic well-being of communities.
To help inform its member organizations, AIB has produced a Backgrounder on the Small Business Credit Crunch. These are some of the key take-aways:
- About three-quarters of small business credit comes from traditional financial institutions. At the beginning of 2014, banks and credit unions had about $630 billion in small business loans on their books
- Since 2000, the volume of business lending per capita at banks has grown by 26 percent, but this expansion has entirely benefited large businesses. Small business loan volume at banks is down 14 percent and micro business loan volume (business loans under $100,000) is down 33 percent.
- Local community banks provide a disproportionate share of small business loans. Indeed, it is their declining market share that is largely to blame for the constriction in small business lending. As they lose ground to big banks, there are fewer financial institutions focusing on small business lending and fewer resources devoted to it. The top 4 banks now control 43 percent of all banking assets, but account for only 16 percent of small business loans.
- Credit unions have expanded their role in small business lending, from $14 billion in business loans ten years ago to over $44 billion today. However, only about one-third of credit unions currently participate in this market.
- The U.S. Small Business Administration’s loan guarantee programs have historically played an important role in expanding credit to small businesses that don’t quite meet conventional lending requirements. However, over the last few years the SBA has reduced its support for very small businesses and shifted more of its loan guarantees to larger businesses. Since the mid 2000s, the number of business loans under $150,000 guaranteed by the SBA each year has fallen from about 80,000 to 24,000. Meanwhile, the SBA’s average loan size has more than doubled to $362,000.
The Backgrounder outlines several broad policy solutions, with a focus on strengthening and expanding community banks, increasing credit union business lending, and reorienting the SBA’s loan guarantee programs to once again cater to the needs of businesses that are truly small.