Bankers’ Appetite for Small Business Loans Grows
Lenders say small companies’ balance sheets have improved, making for increasingly competitive lending conditions.
A report released early this year by 7 Federal Reserve Banks contains 78 pages that detail what small businesses, or those that employ 1 to 500 employees besides their owner(s), say about their need for and access to financing. Here, bankers weigh in.
Like the respondents to the 2015 Small Business Credit Survey, Cleveland Fed bank examiners and bankers in the Cleveland Fed’s region—Ohio, western Pennsylvania, the northern panhandle of West Virginia, and eastern Kentucky—say there’s evidence that suggests that credit has become more readily available for small businesses.
The Small Business Credit Survey revealed that financing success rates improved in 2015 compared to those of 2014. Half of small businesses that applied for financing in 2015 got all of the financing they sought from a variety of sources, including large and small banks and online lenders.
Available numbers suggest the climate for small-business borrowers is warming: The nationwide dollar amount of small business loans outstanding has increased since 2010, notes Jenni M. Frazer, a vice president with the Federal Reserve Bank of Cleveland.
Anecdotes suggest improvement, too: Bankers are telling Gil Goldberg, director of the US Small Business Administration (SBA) Cleveland District, that the competition to lend to small businesses is greater than it was 2 or 3 years ago.
SBA bankers are telling me that now they are losing loans because other banks will do them without an SBA guarantee.
“We are seeing more competitive situations where banks are entertaining small business loans without our support,” he says. “SBA bankers are telling me that now they are losing loans because other banks will do them without an SBA guarantee.
“In roundtables with lenders across northern Ohio, lenders are telling me the customers they’re seeing now have stronger balance sheets, stronger equity positions, and stronger cash flows than they had 2, 3, 4 years ago,” Goldberg adds.
From Timothy T. O’Dell’s vantage point, this should be an opportune time for businesses that want credit and have solid business plans.
We all know there are a lot of headwinds out there, but we believe that it’s much more likely than not that the economic conditions for small businesses will continue to get better.
“I know that many of our peers are out there looking for good loans,” says O’Dell, president and chief executive officer of Central Federal Corp. and CFBank, which operates 5 branches in Ohio. “I would say the appetite for good loans of all sizes and all types is as competitive as I’ve ever seen it.”
Is the survey’s finding that 50 percent of small businesses are securing all of the financing they sought good news or bad? O’Dell goes with glass half full.
“If you’re able to say yes to 1 out of 2 applications, that’s pretty good,” he explains. “Credit extension is always a function of creditworthiness and prior experience, of how well the owners of the business have handled their credit and their financial responsibilities. You have a lot of people apply for loans, [but often] the purposes are not for something that would be of interest, or they’re not creditworthy or don’t have a good business plan.”
Bankers say yes more often
How strong the demand is for small business loans differs from region to region, according to the SBA’s Goldberg. In areas such as Fremont, Ohio, he hears that rural lending has plateaued. In Ohio’s metropolitan areas, specifically Dayton, however, lending is growing significantly.
Where lending is heating up, competition can mean loosening of underwriting as bankers vie to win business.
Regulators evaluate lending growth and the risk it presents through the lens of what an institution’s underwriting standards are and how loans adhere to those standards, explains Eric Richmond, a Cleveland Fed supervisory examiner of large banking organizations. If there are exceptions to or deviations from the standards, the number of such exceptions and the way they are aggregated and reported to management is important.
For his part, O’Dell says CFBank has not changed its underwriting.
“Today, we’re able to say, ‘yes’ more often than we were able to 2 years ago,” he says. “That’s without lowering credit standards.
“We’re cautiously optimistic that things will continue to strengthen,” he continues. “We all know there are a lot of headwinds out there, but we believe that it’s much more likely than not that the economic conditions for small businesses will continue to get better.”
Some of those headwinds, O’Dell notes, are the geopolitical incidents in Europe and rising interest rates.
The loss rates, or net charge-offs, of small business loans, defined as loans less than $1 million granted for a business purpose, increased more than the loss rates of many other types of loans during the financial crisis, the Cleveland Fed’s Frazer says. Now those rates are more in line with but still slightly higher than loss rates of other commercial loan types.
Small but mighty
The Small Business Credit Survey also revealed that small businesses that did borrow were most satisfied by their experiences with small-bank lenders.
One reason could be that smaller institutions’ lenders have more time to spend developing an understanding of a business and its borrowing needs, Frazer of the Cleveland Fed observes.
“It was a bit surprising to me,” Frazer says of the satisfaction being higher with small institutions versus large, “because the large banks have made a number of investments in recent years in customer satisfaction-type processes.” She cites as an example the training of customer service reps. “The survey results appear to indicate that those investments are not yet paying off,” she notes.
Goldberg, though, observes that the lion’s share of the SBA lending in northern Ohio is done by large institutions such as Huntington Bank. (Importantly, northern Ohio is only 1 region in 1 state covered by the credit survey.)
No matter the size of the institution extending the credit, Cleveland Fed examiners stress that the loans any bank is making should fit that bank’s tolerance for risk. Where small businesses’ financial performance and financing needs don’t meet institutions’ risk tolerances, it’s a positive that other sources of capital, such as angel investors and online lenders, exist to support them, Frazer notes.
“It’s good for the small business, for the startup, for the economy, to have that avenue for growth,” she says.
Sum and substance: Results of the 2015 Small Business Credit Survey suggest that credit has become more readily available, and, likewise, Cleveland Fed examiners and area lenders say bankers’ appetite for small-business lending has improved, as has the creditworthiness of small companies.
Results of the 2015 Small Business Credit Survey reveal that many of the small employer firms surveyed were successful in securing some or all of the credit they sought. Forefront shares more survey findings here.