With big banks originating fewer loans for small businesses, nonbank lenders have stepped up to the plate—albeit at higher rates than what small businesses are accustomed to
Lyle Adriano
The United States’ biggest banks are making even less loans to small businesses than they did about ten years ago, according to a Wall Street Journal story. Because of this, alternative non-bank lenders have acquired the market share of some of these banks and are able to charge considerably higher rates for their services.
Based on the report (with data from the banks’ federal regulatory filings ), 10 of the country’s major banks issuing small loans to businesses lent $44.7 billion last year, down 38% from 2006’s $72.5 billion. Banks this year originated 43% of business loans of up to $1 million through August, down from 58% for all of 2009, according to information from PayNet Inc.
As a result of this decrease, nonbanks lenders increased their market share to 26% from 10%, with corporations lending to business customers or suppliers comprising the bulk of these nonbank entities.
The WSJ report said, as of September 30, that banks of all sizes held $598 billion in small loans to businesses, with data from the Federal Deposit Insurance Corporation. This is a 16% drop from a peak of $711 billion in 2008. On the other hand, loans to larger customers surged 37% at the same time period.
The WSJ suggested that this trend was caused by a decline in new business formation. The report also noted that banks have been slower to ease lending standards for small firms than for big ones since after the recession. It also implied that banks might not see small business lending to be as profitable as loans that better fit into standardised approval and repayment processes.
