The Wall Street Journal writes this morning that the biggest banks in the US are making far fewer loans to small businesses than they did a decade ago. The Journal reports that the 10 largest US banks held $44 billion in small business loans (loans less than $1 million) in 2014, down 38% from a peak of $73 million in 2006.
What’s made big banks reluctant to make small loans?
Budgets. Imagine you are a manager of a small bank with $100 million in loans and a budget which says you need to grow your loans by 10%/year. A $1 million lending relationship gets you 1/10th of the way to your budget. On the other hand if you manage a large bank media division with $1 billion in loans a $1 million loan gets you 1/10th of one percent towards your budget. You’re more interested in a $100 million loan.
Overhead. Big banks have expensive bankers and lots of regulatory personnel. It costs just as much to originate a $1 million loan as it does to originate a $25 million loan. Which would you do?
Regulators. Regulators love to see a well documented credit file and large companies with large loans are going to produce much more paperwork and reporting to keep the regulators happy.
Credit Scoring. Big banks make small loans using credit scoring systems which are biased towards firms with liquid assets and hard assets (e.g. receivables, inventory, equipment). Credit scoring systems reject small businesses like billboard companies which have a value well in excess of their tangible assets. And the big bank media departments don’t want to make small loans for the reasons discussed above.
What’s the solution? Look for a private lender such as Billboard Loans or a local or regional bank which is willing to take the time to understand your business. Don’t waste your time on the US Bank or Wells Fargo or JP Morgan Chase…