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Tip of the Month for August 2014

Tip: Finding Solutions to Small Business Credit Issues

The New York Federal Bank recently hosted a summit on small business credit innovations, bringing together experts to discuss solutions to the credit gap that small businesses have been facing post-recession. Although some financial institutions disagree, many business owners believe they have suffered more from tighter lending policies than mid- and large-sized businesses. Many feel that rebounding from the recession was harder for the small business sector – chiefly because small firms are more reliant on bank financing to support their growth.

Small Businesses Drive the U.S. Economy

For decades, the small business sector has been the acknowledged dynamo that fueled job creation nationwide, providing the innovative spark that keeps our nation competitive in the world arena. It’s estimated that small businesses employ about half the U.S. private sector workforce, and, most importantly, are responsible for two-thirds of all jobs created in the United States over the past two decades. Small businesses are not generating jobs like they were pre-recession, and this has major implications for the U.S. economy. Here’s a synopsis of some of the highlights of the New York summit.

State of the Credit Market

  • Small business loans ($1 million or less) from banks are below their pre-recession levels and remain flat. In 1995, small business loans represented about half of all total bank loans; by 2012, this total had declined to 30 percent.

  • Demand is growing for business loans of $100,000 to $500,000 – an under-served segment of the market.

  • Small businesses lack the range of options open to larger companies, such as equity capital and public institutional lending.

  • Alternative lenders including crowd funding, short-term loans and cash advances are beginning to grow, although current statistics show that two-thirds of all small business loans still come from banks.

  • Small businesses’ key needs include access to short-term loans, minimal paperwork and fast turnaround once applications have been made.

New Products

  • Traditional lenders – banks and financial institutions – are beginning to develop new products to meet the needs of borrowers looking for loans of $250,000 or less. These include charge cards specifically for small business owners. The Small Business Administration is also developing new concepts under its Community Advantage Program.

  • In many instances, the emergence of new sources of credit owe a great deal to technology and the Internet, providing would-be borrowers with new ways to seek and identify individuals and entities willing to provide loans. Crowd funding is perhaps the best known new type of alternative funding. Others include the Lending Club (peer-to-peer lending), CAN Capital (merchant cash advance funding) and PayPal (e-commerce lending).

  • Increasingly, small businesses are becoming more willing to use technology and online matchmaking platforms to obtain the credit they need. These new sources have helped streamline the application, review and underwriting process, thus lowering costs for both borrowers and lenders.

  • Alternative lenders can operate without the red tape and lengthy processes that accompany more traditional business loan transactions. This makes them attractive to entrepreneurs. However, their interest rates may be higher – in the credit card range – and their repayment terms more stringent.

  • New technology and credit sources have not changed the need for small business owners to be organized and able to present their cash flow and market predictions with clarity. Likewise, nontraditional lenders still need to do their homework to better understand the priorities and investment decisions of their loan customers.

Undeniably, many small business owners believe that banks remain unwilling or nervous about lending to them. For more information on the credit gap debate, business owners can review the Federal Reserve Bank of New York’s online reports, or contact the SBA for information on loan initiatives.

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